Influence of Cognitive Biases on Investment Decision Making in Property Market in Plateau State, Nigeria

Abstract

A big number of investors are investing in property market without sound decision making leading to stagnation of investment. Thus, this study was aimed at establishing the cognitive biases influencing investment decision-making in property market in Plateau State, Nigeria. Five objectives guided the study; the influences of anchoring bias, overconfidence bias, narrow framing, representativeness bias and disposition effect on investors‟ decision making. Descriptive research design was used in the study. The study population comprised of 1650 registered property investors who were investment traders at the property market in Plateau State and licensed to operate in the property market in the state. Property investors were targeted. Multi-stage sampling procedure was used in the selection of representative sample comprising of purposive sampling and the normal approximation to the hyper-geometric distribution to select the sample size. The final sample size was thus comprised of 312 respondents. Primary data was collected using standard questionnaires with both closed and open ended questions. Cronbach‟s Alpha Test was used to test the internal consistency reliability of measurements. The study employed both descriptive and inferential statistics to allow presentation of data in a more meaningful way and thus simpler interpretation of data. The study performed tests on statistical assumptions such as test of regression assumptions and statistics used. This included tests of reliability, normality, linearity, independence, heteroscedasticity and multicollinearity. The linear regression analysis results further confirmed that there was a significant positive linear relationship between anchoring bias, overconfidence, narrow framing and representativeness bias in investors‟ decision making in property market in Plateau State, Nigeria. The study concluded that anchoring bias, overconfidence, narrow framing, and representativeness and disposition effect in making investment decisions is solely determined by years of experience as an investor. The positive coefficient on these variables was consistent with expectations that more experienced investors used more personal judgment in making decisions. The study further concluded that investors need to invest for the long-term, identify their level of risk tolerance, determine an appropriate asset allocation strategy, and rebalance portfolios at least yearly. The main recommendation for investors is to make constant attempts to increase their awareness on behavioral finance by educating themselves on the field. Studying about the biases and reflecting on their decisions are likely to help achieve better self-understanding of the extent and manner to which they gets influenced by emotions while making financial decisions under uncertainty. Even after satisfactory awareness is achieved, it is highly recommended that they maintain a chart of the behavioral biases they are likely to be vulnerable to.