The purpose of this study was to examine how behavioral biases effect on stock market performance. This study was guided by the following research question: How does disposition effect influence stock market performance? To what extent does overconfidence effect influence stock market performance? To what extent does herding effect influence stock market performance?
This study adopted a descriptive survey design. The study population was 338 out of which a sample of 183 was utilized. Stratified and random sampling was used to select investment advisors from the 24 licensed stock brokerage firms. A structured closed-ended questionnaire tool was used to collect primary data. Data was analyzed for descriptive and inferential statistics using Statistical Package for Social Studies (SPSS) version 23 and presented using Tables and Figures.
The first research question sought to examine whether disposition effect influences stock market performance. The findings show there exists a statistically significant relationship between disposition effect and stock market performance
The second research question sought to determine the extent to which overconfidence effect influences stock market performance. The findings show that there exists a statistically significant relationship between overconfidence effect and stock market performance.
The thirst research question sought to determine whether herding effect influences the stock market. The findings show that there exists a statistically significant relationship between herding effect and stock market performance
This study concludes that the bias of disposition effect particularly on price runs-ups, good asset pricing, poor asset pricing, and speculation does significantly influence stock market performance. Equally, this study concludes that overconfidence in stock market prices and activities, overestimation of stocks performance, and miscalibration of the stocks do negatively influence the stock market. This study also concludes that heading effect can either influence the stock market positively or negatively depending on the nature and experience of the herders on the market. Information cascade and reputational herding do have a negative effect on the market in markets with behavioral biases
This study recommends that investment advisors trading on the stock market should be trained on how to identify, and interpret disposition biases prevalent at the market place in terms of price run-ups, good asset pricing, and also bad asset pricing so as to make good trading without negatively affecting the stock market performance. This study also recommends that investment advisors should be trained on reading and detecting presence or prevalence of overconfidence, overestimation, and miscalibration on specific stocks on the stock market, and be able to determine whether these stocks have fundamental underlying value aligned with their pricing. Finally, this study recommends that regulatory mechanisms should be put in place to curtail insider trader information cascades particularly from investors with insider trading information that fuel herding effect at the stock market.
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