Effect of Overconfidence on Individual Investment Decision: Evidence from the Investment Services Sector in Kenya

Abstract

Investor behaviour has an influence on investment decisions. Hence, it does not matter how bright an investor is, how much research they have done or even how deep they have studied about the stock before investing. They always have tendencies to behave irrationally with the fear of making losses. The main objective of this study was to examine the effect of overconfidence behavior on investment decision making among individual investors in the Investment Services Sector in Kenya. The study adopted a descriptive and quantitative research design. The study population was 12,159 local individual investors per the NSE annual report of 2015. The sample used was 372 individual investors. Stratified random sampling was used to divide the data into 47 strata representing the 47 counties. Simple random sampling was then used to select 8 investors from each county. Response was received from 253 individual investors out of 372 who constituted the sample size, representing a response rate of 68%. Primary data was used for analysis using multiple linear regression model. The findings indicated that 50.1% of the individual investment decision in the Investment Services Sectors can be explained by overconfidence. This indicates that investors were overconfident in their investments (R-Squared=0.501) as measured by trading's done with prior information, number of trading's done in between accounting periods and the bid spread. Overconfidence had a statistically significant positive linear relationship on individual investment decision making (p-value was 0.006). The study therefore recommends that investment factors and market statistics need to be analyzed by investors using sound business knowledge before any investment decision making. In addition, investors need to look into economic and market indicators and interpret them well as they have an influence the performance of the shares, rather than investing based on cognitive and psychological intuitions.