Abstract
Behavioural finance is still a new arear which attempt to better understand and explain how emotional and cognitive errors influence investment on the stock markets. The main objective of this study was to establish the effect of confirmatory bias on investment in the Rwanda Stock Exchange. The study used cross-sectional descriptive survey research design to ascertain and establish the effect of behavioural biases on investment in the Rwanda stock exchange. The target population comprised of 13,543 individual, group investors at the Rwanda Stock Exchange. Random sampling was used where the targeted population was individual investors to finally yield a sample size of 374 respondents. A questionnaire was used to collect the primary data. A pilot test was undertaken by carrying out a small scale trial run of the research instrument. Data analysis involved the use of descriptive and inferential statistics. A Linear regression model was used to predict the probability of different possibility outcomes of dependent variables, helping to predict the probability of an investor to invest in RSE. The results confirmed that there was a significant positive linear relationship between confirmatory bias and Investment in Rwanda stock market. The study also concluded that most investors suffered from confirmatory bias in investment in stock markets. The study recommends that investors should be keen to identify such bias to increase their rationality in stock trading.
Highlights
IntroductionBackground of the Study Behavioural finance is the new field that seeks to combine behavioural (aspirations, cognition, emotions) and cognitive psychological theory
Background of the Study Behavioural finance is the new field that seeks to combine behavioural and cognitive psychological theory
I prefer to buy local stocks than international stocks because the information of local stocks is always available and very reliable I rely on previous experiences in the market for my investment I use trend analysis of some representative stocks to make investment for all stocks that I invest in because of its accuracy I normally take precautionary measures due to the poor performance of the stock market The stocks I bought expecting dividend income, always pay high dividends I find it easier to trade in stocks I had bought for liquidity purposes
Summary
Background of the Study Behavioural finance is the new field that seeks to combine behavioural (aspirations, cognition, emotions) and cognitive psychological theory. It explains why investors makes a rational financial decisions on the stock market It describes the outcomes of interactions between investors and managers in financial and capital markets; and it prescribes more effective behaviour for investors and managers. The investment is mostly influenced in a large proportion by psychological and emotional factors [39]. Behavioural finance attempt to better understand and explain how emotional and cognitive errors influence investment on the stock markets The stock markets are able to positively influence the economic growth through encouraging savings amongst individuals and providing avenues for firm financing. Investment is not an easy process, since the assumption is that investors always expect to maximize the returns not all investors are so rational Traditional financial theories assume that investors are rational and risk averse, and hold diversified, optimal portfolios this doesn’t work in reality since investors must consider the behavioural biases in investing as this can help the investors to avoid some unnecessary mistake made in investment in order to maximize the return and minimize the risk [39]; [3]
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