The Impact of Behavioural Finance on Investment Decision-making: A Study of Selected Investment Banks in Nigeria

 Global Business Review


In this study, the impact of behavioural finance on investment decision-making using a selected investment banks was investigated. A total of 200 questionnaire items were administered to the respondents of the four surveyed investment banks including Afrinvest West Africa Limited, Meristem Securities, Vetiva Capital and ARM Nigeria Limited, out of which 180 questionnaire items representing 90 per cent were retrieved. The data were analyzed using tables, percentages, correlation and multiple regression analysis. The overall empirical results provided evidence of a positive impact between behavioural finance and investment decision, supporting previous research and contributing to generalization. The other findings of the research are thus: there is a significant relationship between heuristics and individual investment decision; there is a significant relationship between prospect theory and individual investment decision; and lastly there is a strong and negative relationship between heuristics and investment decision. Similarly, the relationship between prospect theory and investment decision is negative and strong. Against the backdrop of the aforementioned findings and conclusion, the following recommendations are proposed to both the institutional and individual investors: investors should be enlightened on the fact that there are many behavioural factors which can affect their investment decision-making process and they should be made aware of these factors including heuristics and prospect theory.

These theories are founded on the idea that investors behave rationally, meaning that they consider all available information in the decision-making process. Hence, investment markets are efficient, reflecting all available information in security prices. In other words, prices reflect the intrinsic values of the assets. These theories are also formulated on the principle that investors act promptly and faster to new information and update prices correctly within the normatively acceptable process. The market returns on investment are however believed to follow a random walk theory, which postulates that stock market prices evolve according to a random walk and thus cannot be predicted. This is consistent with the efficient-market hypothesis. Underlying all these is the theory of arbitrage, which suggests that rational investors undo price deviation away from the fundamental values quickly and maintain market equilibrium. As such, as posited, ‘prices are right’ reflecting all available information and there is no ‘free lunch’. According to Fama, ‘no investment strategy can earn excess risk-free rate of return greater than that warranted by its risk’.

These researchers have many times argued that the basic facts about some market variables such as the aggregate stock market, the cross-section average returns and individual trading behaviour are not easily understood in this framework, hence the importance of behavioural finance. Many researchers in behavioural finance believe that behavioural finance gives convincing answers to the questions left unanswered in the traditional finance models. Researchers have been able to uncover a surprisingly large amount of evidence of irrationality and repeated errors in judgement. The field of behavioural finance attempts to better understand and explain how emotions and cognitive errors influence investors in their decision-making process. Behavioural finance is different in its view from the traditional belief in that investment decisions are not always made on the basis of full rationality. Behavioural finance is the study of the influence of psychology on the behaviour of financial practitioners and the subsequent effect on markets. He further opined that behavioural finance is of interest because it helps explain why and how markets might be inefficient.

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