Effect of Investor Psychology of Fund Managers on Portfolio Performance of the Investments Firms in Kenya

Abstract

Abstract

This paper examines the effect of investor psychology of fund managers on the performance of the portfolios they manage. The study established that fund managers were influenced by risk aversion, overconfidence, herding behavior, risk aversion and greed in their investment decisions. The effect on portfolio performance was found to be positive and significant. The fund managers were found to be more prone to risk aversion and least prone to greed. Based on the findings, there is need for the enhancement of portfolio performance through aligning investor psychology traits with effective strategies. The effect of risk aversion suggests that cautious investors who weigh potential losses carefully are still able to achieve strong portfolio performance, potentially through balanced, well-diversified portfolios that manage downside risk. In terms of herding behavior, it depicts that popular investment trends can yield favorable results, though it also highlights the importance of monitoring market dynamics to avoid groupthink risks. The influence of over-confidence bias also implies that investors who trust their judgment and knowledge are likely to make bold investment choices, potentially leading to higher returns. Lastly, the influence of greed highlights that the desire for higher returns can drive effective portfolio growth, though it also points to the need for safeguards against excessive risk-taking. Our findings underscore the importance of understanding and managing investor psychology within portfolio management to balance risk with return, thereby optimizing performance.

Keywords:       Investor psychology, portfolio performance, risk, return, Efficient market hypothesis.