Effect of cognitive biases on individual investment decision in stock market among teachers in Vihiga sub county, Kenya

Abstract

Globally, investment in the stock market is paramount to the establishment of a vibrant economy and personal wealth building and in some instances is influenced by behavioral factors such as cognitive biases. According to Cambridge Analytica, stock market investment among individual investors in the UK has been declining, to average at 13.5 % from 1970 to 2019. The same trend is also reported among Kenyan’s individual investors stagnating at 5.5% in 2019 according to Capital Market Authority report, of whom teachers are a part of. Even though behavioral finance contends that cognitive biases explain this declining participation in stock market investment, previous studies mainly used descriptive research design in investigating factors affecting investment participation among lawyers and financial managers among others. The main purpose assesses the effect of behavioral cognitive biases on teacher investment decision in stock market. Objectives of the study were to: determine the effect of financial literacy bias; cognitive dissonance bias and herd-perception bias on teacher investment decision in stock market investing in Vihiga Sub-County. The study was guided by behavioral finance and efficient market theories. The study adopted correlation research design through binary logistic regression analysis. The target population of the study was 1,126 teachers where stratified random sampling was used to select the sample size of 257 teachers. Primary data was collected through structured questionnaires. The research instrument reliability test yielded alpha coefficients of more than 0.7 implying the instrument elements were consistent and reliable whereas validity was done using two expert reviewers and an average score of 80%. Results revealed that there exists significant effect on individual investment decision of financial literacy bias measured by investment knowledge awareness (β =0.623; Odds Ratio=1.865, p=0.021) and investment services access (β =0.828; Odds Ratio=2.288, p= 0.015); cognitive dissonance measured by teacher perceptions (β =-1.361; Odds Ratio=0.256, p=0.042) and teacher risk averseness (β= 0.984; Odds Ratio=0.374, p= 0.033) and herd- instinct bias by family influence (β= 0.576; Odds Ratio=1.779, p= 0.02) and peer influence(β= 0.432; Odds Ratio=1.5403, p= 0.031). This meant that access to investment services; investment knowledge, family and peer influence increased the log odds of teachers having invested in the stock market while teacher perceptions and risk averseness decreased the odds. Based on the overall relationship financial literacy bias and herd-instinct bias had a positive effect on investment decision while cognitive dissonance bias had a negative effect. Therefore, cognitive biases had significant effect on individual investment decision among teachers in Vihiga Sub- County. Aside from improvement in financial literacy among teachers, the study recommended that more cognitive skills need to be enhanced among teachers and individual investors in Kenya in order to counter the negative effect of cognitive dissonance bias. Study is significant in adding value to existing knowledge in behavioral finance among individual investors in Kenya.