Behavioral factors influencing individual investors Investment Decision making in the share market a study on individual traders at Bedele town

Abstract

The main objective of this study was to determine behavioral factors that influence the individual investors’ investment decision making in the share companies’ at Bedele Town. As there are very few studies about behavioral finance in Ethiopia, this study expected to contribute significantly to the development of this field in Ethiopia. To address research problem and to accomplish research goal, the research design that used in this study was mainly Descriptive and Explanatory research design. The study conducted on the sample of 119 respondents selected by systematic sampling technique and structured questionnaires administered. To Measure the quality of data, researcher used Cronbach's alpha test and to test the hypotheses of the study, Factor analysis, KMO’s, mean scores, percentages, F test, Eigen values and multiple regression analysis used. The result shows that behavioral factors influencing the investment decisions of individual investors at Bedele town are Heuristics: Representativeness, Overconfidence, Anchoring, Availability and Gambler’s Fallacy. Prospect variables: Loss aversion, Regret aversion and mental accounting while Market variables are Price changes, Market information, past trends of shares, Fundamentals of underlying shares, Customer preference, over, and under reaction to price changes. In addition, herding variables Impacts of other investors’ decisions, Buying and selling, choice of trading shares, Volume of trading shares and Speed of herding are influence the investment decisions of individual investors. This study also tries to find out the impact level of behavioral factors on investment decision making of individual investors. The result shows that, Representativeness, anchoring, and Gambler’s Fallacy have moderate impacts on the decision making of individual investors While Overconfidence and Availability Bias have high impacts on the decision making of individual investors. Loss aversion has moderate impacts on the decision making of individual investors while Regret aversion has very low impacts and mental accounting have low impacts. Price changes, past trends of shares and Customer preference have moderate impacts on the decision making of individual investors. Market information and Fundamentals of underlying shares has high impacts on the decision making of individual investors while over and under reaction to price a change has low impacts regarding market factors. In relation with Herding effect, individual investors at Bedele town follow moderately the Impacts of other investors’ decisions; they more or less tend to consider the others’ behaviors of Buying, selling, choice of trading shares, Volume of trading shares and Speed of herding. Furthermore, the study tries to find out the relationships between these behavioral factors. The study revealed that, Heuristics and prospect factors are significant and have positive impacts while market and herding factors have insignificant and have positive impacts on the investment decision making of individual investors in share companies at Bedele town.