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