Effect of behavioural factors on the investment risk profile of investment schemes members in Nairobi County
Date
2023
Authors
Omoding, A. I.
Journal Title
Journal ISSN
Volume Title
Publisher
Strathmore University
Abstract
Studies conducted in behavioral finance science provide diverging and inconclusive results with respect to how behavioral biases blur investment decision making. Additionally, behavioral science studies have provided differing results compared to arguments of traditional finance theories, which suggest that investors are rational and make investment decisions after keen analysis of all available information. Behavioral finance suggests that investment decisions are greatly affected by irrational, emotional and psychological factors. It is against this background that the current study was premised to examine the effect of psychological biases and heuristics on the investment risk profile of members of investment schemes in Kenya. The study sought to respond to the following objectives: to assess the effect of heuristics on the investment risk profile of investment group (chama) members in Nairobi County and to examine the effect of psychological biases on the investment risk profile of investment group (chama) members in Nairobi County. The study was guided by behavioral finance theory and employed an explanatory research design. The study targeted all the 121 registered Chamas in Nairobi (Kenya Association of Investment Groups (KAIG) database). The study targeted three employees drawn from each of the chamas. The data analysis phase applied both descriptive and ordinal regression analysis. The survey was able to obtain an 81% response rate with only 19% of the considered sample respondents not able to present their questionnaires within the provided timeframe. Findings pointed out that most of the groups 48% had 11-30 members, 29% had 31-60 members with 18% having less than 10 members. The correlation results revealed that there was a weak positive and significant association between psychological biases, demographic factors and the investment risk profile of investment groups in Nairobi County. The correlation tests also revealed a strong positive and significant association between heuristic biases and the investment risk profile of investment groups in Nairobi County. Based on the study’s first objective, the study concluded that psychological biases and heuristic biases have a positive and significant effect on investment risk profile of investment groups in Nairobi County. Finally, the study concluded that demographic factors had an insignificant control effect on the investment risk profile of investment groups. The study recommended for oversight and supervision of investment groups to ensure that they comply with relevant laws and regulations. This can help to protect investors and promote a fair and transparent investment environment. Further individual groups should also establish a rigorous investment appraisal process that incorporates multiple perspectives and considers all relevant factors. The study also recommends that Chamas adopt a diversified investment strategy across different asset classes and industries to mitigate the risk of loss associated with concentration risk. This can help to minimize the impact of any single investment's performance on their overall portfolio.
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Citation
Omoding, A. I. (2023). Effect of behavioural factors on the investment risk profile of investment schemes members in Nairobi County [Strathmore University]. http://hdl.handle.net/11071/13376