Original Article

The Impact of Behavioural Finance Global Business Review

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on Investment Decision-making: A © 2019 IMI
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Study of Selected Investment Banks in.sagepub.com/journals-permissions-india
DOI: 10.1177/0972150919851388
in Nigeria journals.sagepub.com/home/gbr

Olubunmi Edward Ogunlusi1

Olalekan Obademi1

Abstract
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.

Keywords
Behavioural finance, heuristics, prospect theory, investment decision

Background of the Study

The financial theory based on Modern Portfolio Theory (MPT) and Capital Asset Pricing Model (CAPM)
as postulated by Markowitz (1952) and Sharpe (1964), respectively, had since defined the way in which

1
UNILAG Nigeria, Lagos, Nigeria.

Corresponding author:
Olubunmi Edward Ogunlusi, UNILAG Nigeria, Akoka 100213, Lagos, Nigeria.
E-mail: [email protected]
2 Global Business Review

academics and practitioners analyze investment performance (Kishore, 2005). 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 (Kishore, 2005). 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 by Kishore (2005), ‘prices are right’ reflecting all available information and there is no ‘free
lunch’. According to Fama (1965), ‘no investment strategy can earn excess risk-free rate of return greater
than that warranted by its risk’.
As stated earlier, MPT, CAPM and Arbitrage Pricing Theory (APT) are the quantitative models that
underpin the rational expectations-based theories (Markowitz, 1995; Sharpe, 1964). However, this
theory is yet to be confirmed in available investment data by a large amount of studies such as Fama and
French (1993, 1996). 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 (Kishore, 2005).
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.
According to Sewell (2007), 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.
The expectations-based models argue that the above-described irrationality will be undone through
the process of arbitrage (Friedman, 1953). According to Kishore (2005), arbitrage is an investment
strategy that offers risk-less profit at no cost. Traditional finance theorists believe that any mispricing
created by irrational traders (noise traders) in the marketplace will create an attractive opportunity which
will be quickly capitalized on by the rational traders (arbitrageurs) and the mispricing will be corrected.
Behavioural finance argues that there is limits to arbitrage, which allows investor irrationality to be
substantial and have long-lived impact on prices. To explain investor irrationality and their decision-
making process, behavioural finance draws on the experimental evidence of the cognitive psychology
and the biases that arise when people form beliefs and preferences, and the way in which they make
decisions, given their beliefs and preferences (Barberis & Thaler, 2003). As such, limits to arbitrage and
psychology are seen as the two building blocks of behavioural finance.
The investment behaviours of Nigerians can typically be modelled after the Nigerian Stock market.
The Nigerian Stock Market capitalization attained an all-time peak of N13.5 trillion as of March 2008
and began to plunge after the global meltdown occasioned by the sub-prime mortgage crisis in the
United States which spilled over to other countries of the world. Ever since then there has been consistent
decline in the fortune of the Nigerian investors in the stock market. According to Oke (2013),
Ogunlusi and Obademi 3

a number of reasons have been advanced to try and explain this stock market anomaly, including the seeming
collapse of the world economy, withdrawal of many foreign investors from the Nigerian market, banks short-
term orientation imposed on long-term capital market, regulatory inconsistencies and pronouncements, poor
corporate governance, poor credit appraisal before lending, amongst others. The best of these reasons is not
satisfactory, particularly given that a number of them have been addressed yet the stock market crisis remains
unresolved.

However, much is unknown even till today about the human psychology and investor irrational behaviour
factors that influence their decision-making process. The key question that if this anomaly could be a
result of investor irrational behaviour remains. To be more specific, what impact does heuristics and
prospect theory (which are the two major components of behavioural finance) have on investment
decision?
In conclusion, the first section of this article is the background of the study which introduces and
gives a brief background to the study. The second section reviews the literature, which includes the
theoretical, conceptual and empirical review of the study. The third section is the study methodology
which explains the data source, sample frame and the empirical model employed in the study. The fourth
section is data analysis and discussion of findings, while the last section of the article discusses the study
conclusion, managerial implications, limitations and suggestions for future research.

Literature Review
Traditional theory of finance is based on belief of the investors’ rationality and efficiency of the market.
Rationality implies that any new information is correctly interpreted by all the market agents, while
market efficiency means that all relevant information is reflected in the market prices instantaneously
and completely. Hence, there is no investment strategy which can earn the investors excess returns
consistently. Many traditional finance models such as Capital Asset Model, Modigliani–Miller Model,
Modern Portfolio Theory and many others are based on these aforementioned assumptions. These
models were said to have revolutionized the finance landscape and still do but at the same time left a trail
of unanswered questions in explaining the respective theories. For instance, issues such as ‘why do
individual investors trade?’ and ‘why do returns vary across stocks for reasons other than risk?’ are left
unanswered by these theories.
While this debate was raging in the financial world, researchers in psychology have discovered that
economic decisions are often made in a seemingly irrational manner. This irrationality is based on
cognitive errors and extreme emotions, which is the root of behavioural finance. According to Subash
(2012), ‘behavioral finance is a branch of finance that studies how the behavior of agents in the financial
market are influenced by psychological factors’. This influences affect individual investors in the buying
and selling of securities, and consequently affect the stock prices. Babajide and Adetiloye (2012) argued
that ‘behavioural finance suggests that investors do not always act rationally when making investment
decisions, even if they possess the inputs required to make a rational decision, such as information,
knowledge, and understanding’. Huckle (2007) described behavioural finance as that aspect of finance
that employs scientific models to describe how people make financial decisions in the real world, rather
than in theory. According to Babajide and Adetiloye (2012), ‘behavioural finance shows how our human
psychology influences our financial decisions and it identifies the consistent, predictable mistakes
4 Global Business Review

humans make when investing’. According to Sewell (2007), ‘behavioral finance is the study of the
influence of psychology on the behaviour of financial practitioners and the subsequent effect on markets’.
Behavioural finance is the science that deals with theories and experiments focussed on what happens
when investors make decisions based on hunches or emotions. Shefrin (2000) defines behavioural
finance as ‘a rapidly growing area that deals with the influence of psychology on the behavior of financial
practitioners’.
A study by Alquraan, Alqisie, and Al Shorafa (2016) examined whether behavioural finance factors
influence stock investment decisions of individual investors using Saudi Stock Market as the case study.
The study employed primary data and used Multiple Linear Regression and ANOVA methods to test the
hypotheses. The results of the study indicated that behavioural finance factors (loss averse, overconfidence
and risk perception) have significant effect on the stock investment decisions of individual investors in
Saudi Stock Market, while Herd has insignificant effect. The demographic variables (Gender, Age,
Education, Income and Experience) do not make any significant differences in the investor decision,
except the demographic variable (Education) makes significant differences in the investor decision.
A study by Babajide and Adetiloye (2012) examined investors’ behavioural biases and the security
market using the Nigerian Security Market as the case study. The study employed questionnaire as an
instrument and the technique of correlation with the Pearson Product Moment Coefficient to analyze a
survey of 300 randomly selected investors in Nigeria security market. The study revealed strong evidence
that behavioural biases exist but not so dominant in the Nigeria security market because a weak negative
relationship exists between behavioural biases and stock market performance in Nigeria. The study
recommends that individual investors in the market should engage the services of investment advisors,
which will reduce personal biases in the management of their portfolios.
A study by Kengatharan and Kengatharan (2014) investigated the influence of behavioural factors in
making investment decisions on performance using Colombo Stock Exchange as the case study. The
study begins with the existing theories in behavioural finance, based on which hypotheses are proposed.
Then, these hypotheses are tested through the questionnaires distributed to individual investors at the
Colombo Stock Exchange. The collected data are analyzed by using Statistical Packages for Social
Sciences (SPSS). The result indicates that there are four behavioural factors affecting the investment
decisions of individual investors at the Colombo Stock Exchange which are Herding, Heuristics, Prospect
and Market. Most of the variables from all factors have moderate impacts, whereas anchoring variable
from heuristic factor has high influence and choice of stock variable from herding factor has low
influence on investment decision. This study also tries to find out the influence of behavioural factors on
investment performance. Amongst the aforementioned behavioural factors, only three variables are
found to influence the investment performance: choice of stock has negative influence which is from
herding factor. Overconfidence from heuristics factor has negative influence on investment performance.
Anchoring from heuristics factor has positive influence on investment performance. All other variables
which are volume of stock, buying and selling and speed of herding variables of herding factor, loss
aversion and regret aversion variables of prospect factor and market information and customer preference
variables of market factor do not have influence on investment performance.
A study by Kisaka (2015) investigated the effect of behavioural finance factors on stock investment
decisions in Kenya. The study employed cross-sectional survey research design with a survey
questionnaire to collect data from Nigerian Stock Exchange (NSE) investors within Machakos County
as provided by registered stockbrokerage firms operating within Machakos County. The study targeted
population of 1.67 million active NSE investors under three stock brokerage firms within Machakos
County. From the target population, a sample of 60 respondents was randomly obtained from the three
stock brokerage firms to represent the interests of the rest. The behavioural finance factors that the study
Ogunlusi and Obademi 5

focussed on of certain-return bias, loss aversion, regret aversion and random walk framing have been
found to have an effect on the decisions of the stock market investors though in varying degrees. As such,
the study established that these factors explain 26.5 per cent of the outcomes of stock investors on the
NSE and as such the remaining 73.5 per cent of the decisions of these investors are explained by other
factors, hence the need for further studies that will help in identifying these alternative factors is
recommended.
Bashir et al. (2013) investigated the impact of behavioural biases on investor’s financial decision-
making. Empirical data have been collected through administrating a questionnaire. Correlation and
Linear regression model techniques are used to investigate whether investor decision-making is affected
by these biases. The study concluded that the Confirmation, Illusion of control, Excessive optimism, and
Overconfidence biases have direct impact on the investor’s decision-making, while status quo, Loss
aversion and Mental accounting biases have no impact according to the data collected from financial
institutions.
A study by Alalade, Okonkwo, and Folarin (2014) investigated the investors’ behavioural biases and
the Nigerian stock market returns. This study was motivated by the fundamental explanations given for
the causes of the 2008 collapse of the Nigerian Stock Market. This study adopted a primary data approach
based on survey research design to investigate the effects of behavioural biases on stock market return in
Nigeria. The study also used secondary data from the Nigerian Stock Exchange and employed
questionnaire as an instrument and the technique of correlation with the Pearson Product Moment
Coefficient to analyze a survey of 110 randomly selected investors in Nigeria stock market. The study
found strong evidence that behavioural biases existed but not very dominantly in the Nigeria stock
market because a weak negative relationship existed between behavioural biases and stock market
returns in Nigeria. The article concluded that being aware of behavioural biases in the Nigerian stock
market was a crucial first step in ensuring that investment decisions were properly controlled to avoid
any negative impacts on the individual investors and on the stock market; again, behavioural biases
might be of relevant consideration in portfolio construction in order to moderate these biases.
A study by Anthony and Joseph (2017) investigated the influence of behavioural factors affecting
investment decision. Five behavioural factors, namely overconfidence bias, representative bias, regret
aversion, mental accounting and herd behaviour were some of the behavioural biases of the investors
used in the study. The study sample was taken from investors of Kerala, and the analytical hierarchy
process (AHP) method was used to analyze the intensity of behavioural factors affecting the investment
decision. The result found that the investors of Kerala were highly influenced with overconfidence bias
and regret aversion. Herd behaviour had less effect on their decision-making.
A study by van de Venter and Michayluck (2008) was conducted for the purpose of gaining insights
into overconfidence in the forecasting abilities of financial advisors. Samples were taken amongst the
Australian Financial Planners, and range estimation calibration was used for data analysis. The study
found extensive overconfidence in respondents’ ability to make judgements under uncertainty as shown
by a narrow range of forecasts and a substantial number of inaccurate predictions. The overconfidence is
present when comparing estimates both to the ex-post outcome of a predicted quantity and to an interval
based on historical return volatility.
Raut, Das, and Mishra (2018) investigated the behaviours of individual investors in Stock Market
Trading in India. This study employs structural equation modelling (SEM) for analyzing the data
collected from 396 individual investors scattered across India. The result indicates that the investors are
significantly influenced by herding, information cascades, anchoring, representativeness and
overconfidence, while contagion shows insignificant result.
6 Global Business Review

Prosad, Kapoor, Sengupta, and Roychoudhary (2017) examined overconfidence and disposition
effect in the Indian equity market during 2006–2013. The study employs bivariate and trivariate vector
autoregression (VAR) models and the associated impulse response functions on the Indian equity market
from NIFTY 50 index and individual security returns. The study arrives at three key findings. First, the
presence of the biases, overconfidence and the disposition effect is detected in the Indian equity market
for the sample period. Second, the impact of these two biases can be distinctly segregated for 20
companies amongst the companies in the index. Lastly, the overconfidence bias is found to be predominant
of the two.

Objectives/Rationale of the Study

The objective of this study is to critically analyze the behavioural finance theory and its effect on
investment decision-making. Specifically, this study investigates the impact of heuristics and prospect
theory on investment decision.

Theoretical Framework
The two major theories in behavioural finance field are heuristics and prospect theory. Moreover, how
these two variables relate to decision-making process will be examined in the following paragraphs:
Heuristics are rule of thumbs which can help in decision-making process. Heuristics make decision-
making easier. However, sometimes they can lead to biases, especially when things change. According
to Ritter (2003), heuristics can lead to sub-optimal investment decisions. Sub-optimal investment
decisions might include selling off a profitable asset. For example, when faced with N choices of how to
invest retirement money, many people allocate using the 1/N rule (Ritter, 2003). For example, if there are
three funds, one-third goes into each. If two are stock funds, two-thirds go into equities. If one of the
three is a stock fund, one-third goes into equities. There are many types of heuristics amongst which are
anchoring, framing, herd instinct and availability
According to Phung (2010), the concept of anchoring draws on the tendency to attach or ‘anchor’ our
thoughts to a reference point—even though it may have no logical relevance to the decision at hand. For
example, it is not coincidence when some investors invest in the stocks of companies that have fallen
considerably in a very short amount of time. What the investor is doing in this case is anchoring on a
recent ‘high’ that the stock has achieved and consequently believes that the drop in price provides an
opportunity to buy the stock at a discount. Salesmen use this tactic when they begin to negotiate with a
high price and then work down. The belief is to anchor on high price and when they eventually work
down, the consumer will still think that the lower price represents a good price (Fuller, 2000). Framing
is of the belief that the way an idea is projected to individuals is important. For example, when individuals
are faced with the choice to choose between concepts such as ‘ninety per cent fat free’ and ‘containing
ten per cent fat’ people overwhelmingly prefer the first option (Ritter, 2003). Herd instinct is the
behaviour referred to as ‘follow the leader mentality’. It is the tendency of an individual to follow the
majority because he believes that the decisions made by the majority are always right. This instinct also
occurs in investment terrain when an investor bases his investment decisions of buying and selling on the
majority, which sometimes create bubbles that might eventually crash the price and lead to market
inefficiency (Luong & Thu Ha, 2011). Hirt and Block (2012) argued that herding is more prevalent with
institutional investors rather than with individual investors. This happens most times when mutual fund
Ogunlusi and Obademi 7

managers buy stocks that other managers are buying (Hong, 2005). In availability, an investor sometimes
bases his investment decision on recent happening or occurrence. For example, the way in which an
unemployed person and a person who has just landed a great job will see economic recovery will be
different. While the latter will see his recently gotten job as a sign of economic recovery, the former will
likely not see it that way even though the unemployment rate ticks down. People are most likely to be
overconfident about their abilities. Overconfidence manifests itself in diversification. Entrepreneurs
diversify because they believe that they can succeed in other ventures if they had succeeded in the
current one (Ritter, 2003). Representativeness is evident in people who give too much weight to recent
experience. Investors give new information too much weight in forming their expectations about the
future (Fuller, 2000). For example, when equity prices have been high for many years, people tend to
believe that it is normal. In describing conservatism, Ritter (2003) argued that when things change,
people tend to be slow to pick up on the changes. In other words, they anchor on the ways things have
normally been. Gambler’s fallacy occurs when investors inappropriately predict that a trend will reverse.
According to Shefrin (1999) and Lord et al. (1979) confirmation bias ‘is the tendency of the decision-
makers to put too much weight on evidence that confirms their prior views and too little weight on
evidence that contradicts or invalidates their views’. This indicates that the investors discount evidence
they cannot confirm and select or emphasize evidence they can confirm.
The prospect theory is developed by Kahneman and Tversky (1979). Prospect theory details the
second group of illusions which may affect the decision-making process of individual investors. They
include loss aversion, mental accounting, regret aversion and so on. Loss aversion illusion was first
propounded by Kahneman and Tversky (1979). Simply put, losses loom larger than equal-sized gains
(Benartzi, 2012). According to Phung (2010), people do not encode equal levels of joy and pain to the
same effect. The average individuals tend to be more loss sensitive (in the sense that a he/she will feel
more pain in receiving a loss compared to the amount of joy felt from receiving an equal amount of gain).
Psychologically speaking, the pain of losing $100 is approximately twice as great as the pleasure of
winning the same amount (Benartzi, 2012). The implication is that people hold on to a losing stock for
too long because the realization of a loss brings more pain. On the other hand, people sell winning stock
too early because of the fear of loss. Mental Accounting illusion is based on the belief that people
sometimes separate decisions that should have been combined. For example, people often have a special
fund set aside for a vacation or a new home, while still carrying substantial credit card debt. In this
example, money in the special fund is being treated differently from the money that the same person is
using to pay down his or her debt, despite the fact that not diverting funds for debt repayment increases
interest payments and reduces the person’s net worth. According to Singh (2012), regret aversion arises
due to the desire to avoid feeling the pain of regret resulting from a poor [investment] decision. It
embodies more than just the pain of financial loss, and includes the regret of feeling responsible for the
decision, which gave rise to the loss. This can encourage investors to continue to hold poorly performing
shares. The wish to avoid regret can also potentially affect new investment decisions. Investors may tend
to avoid sectors/firms which have performed poorly in recent times, in anticipation of the regret that they
would feel if they made the investment and subsequently lost money.

Investment Decision-making
Individual investments behaviour is concerned with choices about purchases of small amounts of
securities for his or her own account (Jagongo & Mutswenje, 2014). This decision is made by individuals
8 Global Business Review

who invest in securities. Anthony and Joseph (2017) considered investment decision-making as a
cognitive process since investors make decisions based on many options that are present. Investors
usually undertake investment analysis by making use of fundamental analysis, technical analysis and
judgement. Fundamental analysis, technical analysis and intuitions are based on the different traditional
theories of finance which are anchored on the principle of rationality. However, studies have shown that
investors’ market behaviours are based on the psychological principles of decision-making, which can
be used to explain why people buy or sell stocks. These psychological principles are based on cognitive
biases which deviate from norm or rationality in judgement when investors make investment decisions.

Conceptual Model
Owning to the aforementioned review of literatures, the following conceptual model is developed (see
Figure 1):
The model shows that heuristics and prospect theory are the two major fields of behavioural finance
with each impacting on individual investment decision-making as shown in Figure 1.

Methodology
The study methodology addresses issues such as the source of the data, sample frame, empirical model
and the method of the analysis of the study. Each of these issues is addressed in the subsequent paragraphs.

Data Source
The study employs questionnaire for the data collection. This study utilizes close-ended questionnaires
in the collection of primary data from the sampled respondents. Section A of the questionnaire comprises
the demographic characteristics of the respondents, which include the gender, age, marital status,
educational qualification and so on. Section B comprises the items for measuring heuristics, which are
eight question items, while section C contains items for measuring prospect theory comprises three
questions. Lastly, section D is for the items for measuring investment decisions, which are five in
numbers.

Figure 1. Conceptual Model

Source: The authors.
Ogunlusi and Obademi 9

Sample Frame
Methodology describes the details of the research design adopted for the study. The descriptive research
design is employed for the study. The population of the study consists of the customers of the selected
investment banks, which include Afrinvest West Africa Limited, Meristem Securities, Vetiva Capital and
ARM Nigeria Limited. The study targets a convenient sample of 200 clients of the selected investment
banks. The 200 samples chosen for the study are based on the discretion of the researcher who thinks that
200 respondents are large enough to get the required data for the study.

Empirical Model
Empirical model involves the derivation of mathematical equation that would be used as the basis for
estimation. The model will show the degree of relationship between the prospect theory, heuristics and
investment decision.
However, the linear function of the aforementioned notation is hereby modified and estimated as
follows:

Yt = B0 + B1xt1 + B2xt2 + Ut

where
Yt is a dependent variable and it represents investors’ investment decision-making,
Xt1 is the Prospect theory,
Xt2 is the heuristics,
B0 is the intercept on the Y-axis,
B1, …, B2 are the regression coefficients to be estimated and
Ut is the error or disturbance term.

Analysis
This study aims to examine the effect of behavioural finance on investment decisions. A total of 200
questionnaire items were administered to the respondents chosen from the investment banks using a
convenience sampling method. Of the administered questionnaires, 180 were retrieved representing 90.0
per cent of the questionnaire. The retrieved questionnaire items were then analyzed using tables,
frequency and percentages, multiple regression analysis and correlation using SPSS version 20.
Demographic Classification of Respondents
Table 1 provides the demographic distribution of the respondents. From the table, it is known that 58.3
per cent of the respondents are males, while the remaining 41.7 per cent of the respondents are females.
This shows that the study is not sexually biased. Both genders are equally distributed. The modal age for
the study is between 30 and 39 years. This means that individuals within this age range have the highest
number of investors. Those within the age range of 50 years and above are also very active investors as
they constitute 25.0 per cent of the investor respondents; 58.2 per cent of the respondents are single and
33.3 per cent of the respondents are married. Regarding the educational qualification of the respondents,
41.7 per cent of the respondents are MBA/MSC holders, while 25 per cent of the respondents have other
10 Global Business Review

degrees or certifications. Those who have sufficient financial management knowledge constituted 58.3
per cent of the respondents, while the remaining respondents either do not have the knowledge or do not
even know whether they do.
Results Based on the Heuristics
Table 2 is the results of the items of the questionnaire posed on the respondents based on heuristics. As
shown in Table 2, various responses were given by the respondents, but the respondents seemed to skew
towards strongly agreed and agreed with most of the statements.

Table 1. Demographic Characteristics of the Respondents

Variable Items Frequency Percentage

Male 105 58.3
Gender Female 75 41.7
Total 180 100.0
Below 21 years old 15 8.3
21–29 years old 30 16.7
30–39 years old 60 33.3
Age
40–49 years old 30 16.7
50 years and above 45 25.0
Total 180 100.0
Single 105 58.3
Married 60 33.3
Marital Status
Divorced 15 8.3
Total 180 100.0
WAEC/SSCE 15 8.3
OND/NCE 15 8.3
Educational HND/BSC 30 16.7
Qualification MBA/MSC 75 41.7
Others 45 25.0
Total 180 100.0
Yes 105 58.3
Do you have sufficient No 30 16.7
financial management
knowledge? Don’t Know 45 25.0
Total 180 100.0
Yes 90 50.0
Do you have any work No 75 41.7
experience in the field
of finance? Don’t know 15 8.3
Total 180 100.0
Source: The authors.
Ogunlusi and Obademi 11

Table 2. Heuristics

S/N SA (%) A (%) UN (%) D (%) SD (%)

1 My past history influences 75 (41.7) 45 (25.0) 30 (16.7) 15 (8.3) 15 (8.3)
my present investment
decisions extra efforts
2 Thinking hard and for a long 30 (16.7) 45 (25.0) 45 (25.0) 30 (16.7) 30 (16.7)
time about something gives
me little satisfaction
3 I sell my investment (stock) 45 (25.0) 45 (25.0) 45 (45.0) 15 (8.3) 30 (16.7)
only if it reaches a certain
price
4 My decision to hold on to 45 (25.0) 45 (25.0) 30 (16.7) 30 (16.7) 30 (16.7)
a losing stock is influenced
by a positive news and
information about the stock
5 I may buy mutual funds or 30 (16.7) 75 (41.7) 15 (8.3) 30 (16.7) 30 (16.7)
any other investments if
they are heavily advertised
6 If I roll a die and 30 (16.7) 45 (25.0) 30 (16.7) 30 (16.7) 45 (25.0)
continuously get a 1, I feel
the next roll will not be a 1
7 If I am asked to choose 30 (16.7) 60 (33.3) 30 (16.7) 30 (16.7) 30 (16.7)
between 90 per cent fat-
free food and the one that
contains 10 per cent fat, I
would rather go for the first
option
8 I strongly believe in my 45 (25.0) 60 (33.3) 30 (16.7) 15 (8.3) 30 (16.7)
ability to always choose best
stocks and funds all the time
Source: The authors.

Results Based on Prospect Theory

Table 3 presents the result of the prospect theory. As can also be observed from the table, the majority of
the respondents strongly agreed and agreed with most of the statements.
Results Based on the Investment Decision
Table 4 presents the result of the investment decision theory. As can be observed from the table, the
majority of the respondents strongly agreed with most of the statements.
Correlation Matrix
The correlation coefficient determines the relationship between the variables concerned in the study.
Correlation determines the strength and the direction of the independent variables on the dependent
variable. For instance, in this study, correlation entails the strength and the direction of the relationship
between heuristics and prospect theory on investment decision.
12 Global Business Review

Table 3. Prospect Theory

S/N SA (%) A (%) UN (%) D (%) SD (%)

1 I intend to sell my investments 15 (8.3) 60 (33.3) 45 (25.0) 30 (16.7) 30 (16.7)
immediately it goes back to the
acquisition price
2 Assume I bought a movie ticket 15 (8.3) 60 (33.3) 30 (16.7) 45 (25.0) 30 (16.7)
for N2000. When getting to the
theatre I realized I have lost the
ticket. I will definitely buy another
since I have extra money to do
that
3 I prefer to hold on to a profitable 45 (25.0) 45 (25.0) 30 (16.7) 30 (16.7) 30(16.7)
investment due to the fear of not
participating in the future gain of
the stock
Source: The authors.

Table 4. Investment Decision

S/N Statements SA (%) A (%) UN (%) D (%) SD (%)

1 My investment reports better 64(35.6) 56(31.1) 10(5.6) 30(16.7) 20(11.1)
results than expected
2 My investment in stocks has 79(43.9) 51(28.3) 5(2.8) 20(11.1) 25(13.9)
demonstrated increased cash
flow growth in past 5 years
3 My investment in stocks has 82(45.6) 38(21.1) 15(8.3) 20(11.1) 25(13.9)
a lower risk compared to the
market in general
4 My investment in stocks has a 40(22.2) 32(17.8) 24(13.3) 35(19.4) 49(27.2)
high degree of safety
5 My investment proceeds will be 45(0.25) 55(30.6) 20(11.1) 30(16.7) 30(16.7)
used in a way that
benefit society
Source: The authors.

Table 5. Correlations Matrix

Investment Decision Heuristics Prospect Theory

Pearson correlation 1 −0.713* −0.614*
Investment decision Sig. (2-tailed) 0.000 0.000
N 180 180 180
Pearson correlation −0.713* 1 0.762*
Heuristics Sig. (2-tailed) 0.000 0.000
N 180 180 180
(Table 5 Continued)
Ogunlusi and Obademi 13

(Table 5 Continued)

Investment Decision Heuristics Prospect Theory

Pearson correlation −0.614* 0.762* 1
Prospect theory Sig. (2-tailed) 0.000 0.000
N 180 180 180
Source: Output from SPSS (2018).
Note: *Correlation is significant at the 0.01 level (2-tailed).

Table 6. Model Summary

Model R R2 Adjusted R2 Std. Error of the Estimate

1 0.721 a
0.520 0.515 1.36297
Source: Output from SPSS (2018).
Note: aPredictors: (constant), prospect theory, heuristics.

Table 7. ANOVAa

Model Sum of Squares df Mean Square F Sig.

Regression 356.190 2 178.095 95.869 0.000b
1 Residual 328.810 177 1.858
Total 685.000 179
Source: Output from SPSS (2018).
Note: aDependent variable: investment decision.
b
Predictors: (constant), prospect theory, heuristics.

As shown in Table 5, heuristics and investment decision are strongly negatively correlated, r = −0.713,
p = 0.000. This shows that the lower the evidence of heuristics, the higher the investment decision. In
other words, the more an investor identifies and then alienates heuristics in his decision-making process,
the better is his decision-making. Likewise, prospect theory and investment decision are strongly
negatively correlated, r = −0.614, p = 0.000. This also shows that the less the prospect theory illusion,
the better the decision-making.
Interpretation of Multiple Regression Results
A multiple linear regression was calculated to predict investment decision based on prospect theory and
heuristics. A significant regression equation was found (F [2, 177] = 95.869, p < 0.000) (see Table 7),
with an R2 value of 0.52 (see Table 6). Participants predicted investment decision is equal to 14.859 −
0.153(heuristics) − 0.111(prospect theory), where heuristics is coded or measured as 1 = SD, 2 = D, 3 =
UN, 4 = A and 5 = SA, and prospect theory is coded as 1 = SD, 2 = D, 3 = UN, 4 = A and 5 = SA.
Participants’ investment decision is increased by 0.153 for each unit of decrease in heuristics and for
each unit of decrease in prospect theory, investment decision is increased by 0.111. Both of heuristics
and prospect theory are significant predictors of investment decision.
14 Global Business Review

Table 8. Coefficientsa

Standardized
Unstandardized Coefficients Coefficients
Model B Std. Error Beta T Sig.
(Constant) 14.859 0.377 39.414 0.000
1 Heuristics −0.153 0.021 −0.583 −7.255 0.000
Prospect Theory −0.111 0.053 −0.170 −2.109 0.036
Source: Output from SPSS (2018).
Note: aDependent variable: investment decision.

Test of Hypotheses
However, the coefficient table (see Table 8) shows the impact of the individual behavioural finance
factors on investment decision. According to the table, heuristics and investment decision are significantly
negatively correlated with b = −0.153, p = 0.000.
Likewise, the relationship between prospect theory and investment decision is negative and significant
based on b = −0.111, p = 0.036.

Discussion
The study reveals a significant negative relationship between heuristics and investment decision. This
means that the higher the existence of heuristics, the less effective the investment decision-making of the
Nigerian investors. The converse is also true. In addition to this, the study further revealed a strong
correlation between the two variables. This, in order word, may mean that the existence of heuristics
amongst the Nigerian investors is predominant. The result of this study is in line with the result of the
study undertaken by Kengatharan and Kengatharan (2014), which found negative relationship between
herding and investment decision. Alquraan et al. (2016) found insignificant relationship between herding
and investment decision. Babajide and Adetiloye (2012) found the existence of behavioural finance in
the Nigerian stock market, but quick to add that the existence is not dominant because a weak negative
relationship exists between behavioural finance and stock market performance. Alalade et al. (2014) also
found the existence of behavioural finance, but not very dominant. These are contrary to the result of this
study, which revealed a strong correlation between the two variables and found the existence of heuristics
amongst the Nigerian investors to be dominant.
The study also reveals a significant negative relationship between prospect theory and investment
decision. In accordance with the result of the study, there is also a strong correlation between the two
variables. Alquraan et al. (2016) found a significant relationship between loss aversion (prospect theory)
and investment decision. A study by Kisaka (2015) found significant effects on loss aversion, regret
aversion and random walk framing. Kengatharan and Kengatharan (2014) does not find any significant
relationship between loss aversion, regret aversion and investment decision. Bashir et al. (2013) found a
significant relationship between heuristics and investment decision-making but not between prospect
theory and investment decision. This, however, is contrary to the result of the study which found a
significant relationship between prospect theory and investment decision.
Ogunlusi and Obademi 15

Conclusions
This study aims to examine the impact of behavioural finance on investment decision. The result shows
an overall significant impact of behavioural finance on investment decision. This study has been able to
provide much evidence that heuristics and prospect many times influence investors while making
investment decisions. These cognitive mistakes have the tendency to undermine the whole investment
processes and objectives if not immediately arrested.
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.
Investors should try as much as possible to avoid these behavioural biases when making investment
decisions.
Investors should avoid overconfidence biases while making investment decisions. Noting that good
times will not be permanent.

Managerial Implication
Having proven from the study the existence of behavioural finance in the Nigerian Stock Exchange, it is
important for the policy makers as well as the industry practitioners to take practical steps in checking
the existence of this anomaly, since failure to do so can create unnecessary panic and eventually crash
the exchange. It is important for the practitioners in the industry to create awareness about some of these
biases and find a way of helping investors to reduce their impact. Although a little bit of these biases
could be beneficial but too much of them could be disadvantageous and damaging to the exchange.
Government agencies such as the NSE and Securities and Exchange Commission (SEC) overseeing
the exchange should come up with policies in addressing some of these biases since this will help in
checking them.

Acknowledgement
The authors are grateful to the anonymous referees of the journal for their extremely useful suggestions to improve
the quality of the article. Usual disclaimers apply.

Declaration of Conflicting Interests

The authors declared no potential conflicts of interest with respect to the research, authorship and/or publication of
this article.

Funding
The authors received no financial support for the research, authorship and/or publication of this article.

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