Moderating role of market information in the relationship between behavioral finance biases and the stock investment decision making among Kenyan investors: evidence from Nairobi securities exchange

Abstract

Behavioral finance is an emerging area of study in finance that examines human behavior in relation to financial decision-making, seeking to overcome the limitations of traditional finance by providing explanations for people's economic decisions. It analyzed how investors' instincts and psychology governed their decision-making when investing in securities, focusing on information interpretation and investment attitudes-factors that significantly impacted capital allocation and portfolio choices. This study analyzed the moderating role of market variables in the relationship between behavioral finance biases and stock investment decisions at the Nairobi Securities Exchange, categorizing these biases into three broad behavioral factors: heuristics, prospect, and herding factors. The study was grounded in Heuristic Theory (which explains cognitive shortcuts in decision-making), Prospect Theory (addressing loss aversion and reference-dependent preferences), and Regret Theory (examining how anticipated regret influences choices). The study employed a cross-sectional non-experimental descriptive research design, targeting 24 licensed stockbrokers at the NSE using a census approach. Data was collected through close-end questionnaires administered to two respondents from each brokerage firm, resulting in 48 total respondents. The data was coded and analyzed using SPSS software with logit regression methods. The findings indicated that heuristic biases significantly influenced investment decisions (β=0.448, p<0.001), prospect biases showed substantial impact (β=0.298, p=0.003), and herding behavior demonstrated significant effects (β=0.246, p=0.002). Investors relied on cognitive shortcuts, exhibited loss aversion and regret aversion, and were heavily influenced by social networks and popular trends. Market information emerged as a significant moderator (β=0.497, p=0.001), with interaction effects showing that market information amplified the influence of heuristic biases (β=0.103, p=0.043) and prospect biases (β=0.151, p=0.012) on investment decisions. The study concluded that behavioral biases, particularly heuristics, prospect biases, and herding behavior, had a significant effect on investment decisions at the NSE. It is recommended that investors be educated on the impact of these biases and be encouraged to make data-driven decisions. Furthermore, it emphasized the need for improving transparency market information to mitigate the influence of biases and enhance market efficiency.