The influence of behavioural finance biases on individual investment decisions: Evidence from the Dar es Salaam stock exchange, Tanzania

Abstract

This study examined the influence of behavioral biases on investment decisions among individual investors at the Dar es Salaam Stock Exchange (DSE) in Tanzania. Recognizing that many investors rely on psychological tendencies rather than systematic financial analysis, the research focused on overconfidence, availability, and self-attribution biases. This study applies four key theories: Prospect Theory, Heuristics and Biases Theory, Self-Attribution Theory, and Behavioural Finance Theory to analyze how overconfidence bias, availability bias, and self-attribution bias affect the investment decisions of individual investors in Tanzania. A quantitative cross-sectional design was employed, and data were collected from 396 investors using structured questionnaires. The data were analyzed using multiple linear regression to assess the impact of these biases on investment decision-making. The findings revealed that self-attribution bias had the strongest positive influence on investment decision-making (β = 0.379, p < 0.001), followed closely by availability bias (β = 0.377, p < 0.001). Overconfidence bias, also showed a positive but weaker effect (β = 0.086, p = 0.036). The model explained 45.1% of the variance in investment decision-making (R² = 0.451), indicating that nearly half of investors’ choices could be attributed to these behavioural biases. These results suggest that investors who overestimate their skills, rely on readily available information, or attribute success to personal ability while externalizing failure are more prone to making biased investment decisions. The study concludes that behavioural biases play a significant role in shaping investment behaviour in Tanzania’s retail stock market. It recommends strengthening financial literacy programs, integrating behavioural finance principles into investment education, and providing advisory services that help investors recognize and mitigate cognitive biases. Such measures can enhance rational decision-making, reduce the risks associated with biased trading, and contribute to sustainable market efficiency and stability in Tanzania’s capital markets.