IOSR Journal of Business and Management (IOSR-JBM)

e-ISSN: 2278-487X, p-ISSN: 2319-7668. Volume 21, Issue 5. Ser. V (May. 2019), PP 32-37
www.iosrjournals.org

Effect of Financial Literacy on Teacher Investment Decision in

Vihiga sub-county, Kenya
Mr. Jesse Isiaho Ludenyo1, Dr. Robert Kisavi Mule 2
1
Accounting & Finance Department, Maseno University, Kenya
2
Accounting & Finance Department, Maseno University, Kenya

Abstract: This study investigated the effect of cognitive biases on teacher investment decision to ascertain
whether the variables of financial literacy, cognitive dissonance and herd instinct play a role in influencing the
decision to invest. Stratified Random sampling was used to select the appropriate sample size of 102 teachers
and primary data collected through structured questionnaire. It was found that there exists positive correlation
p=.208 at 0.01 significance level between financial literacy and investment decision. Further regression
analysis revealed a positive effect of Financial literacy on investment decision (β =.304;p=.000) therefore
concluding that financial literacy is crucial in influencing investment decision. . It recommended that the stock
market players including the Capital Markets Authority enhance their sensitisation mechanism to disseminate
more information about stock market investment to potential local investors, especially teachers and ensure
equal availability of financial information in both urban and rural areas in the country.
Keywords: Capital Markets Authority (CMA), Nairobi Stock Exchange, Stock Market, Teachers Service
Commission
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Date of Submission: 26-04-2019 Date of acceptance: 11-05-2019
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I. Introduction
Investment decision is concerned with choices about purchases and sale of small amounts of market
products by an individual or institution on his or her own account for future benefits. Riley and Brown (2006)
define investment as a commitment of funds for a period of time in order to derive a rate of return that will
compensate the investor for the time which the funds are invested, for the expected rate of inflation during the
investment horizon and for uncertainty involved. Investment decision and participation in stock markets among
teachers is critical to this point. It can be examined through two frontiers; choice of investment and depth of
investment. With respect to choice of investment, standard economic theory argues that investors decide
whether to invest in the stock market based on market returns, relative to returns on the risk-free assets, stock-
market volatility and individual risk aversion, (Li, 2009). Teachers as part of moderate income earners with
disposable income have the option of investing their surplus income either in the stock market or in other
investment opportunities at their disposal.
The decision to invest in stock market is generally propagated through purchase of securities offered by
and at the Nairobi Securities Exchange. Schleifer (1990) alludes that stock markets have a close interdependent
and perpetual relationship with the economy and they play a significant role in economic development
particularly in; enabling companies to raise equity capital to fund growth requirements, existing projects and
acquisition opportunities and/or reduce current gearing levels in the company; providing governments with a
platform to raise debt funding for developmental projects through the issue of bonds; providing companies with
a currency, in the form of listed shares, that they can utilize to make acquisitions; facilitating investment by the
public into fast growing and high yielding economic sectors while enabling small investors to participate in the
growth and future wealth of profitable companies. The positive correlation between stock market and economy
implies that the positive performance of stock market will positively affect the development of the economy and
vice versa and the aggregation of individual investment decision can be quantified and measured to generate
investment participation which at high levels signifies better performance of the stock market in any given
economy (Matthew 2017).
Lack of awareness is a determining factor in financial literacy (Mehmet 2015). If financial literacy is
achieved in the mindset of an investor, the decision to invest will be made on a more informed basis, meaning
that they will have greater potential make decisions based on informed analysis of financial statements, dividend
policies and other related information, (Johnson 2002). According to Aroni (2014), using both descriptive and
explanatory designs to analyse primary data on a sample size of 364 respondents, concluded that in making
decisions to invest individuals behaviors will be driven by personal frames, including availability of financial
information to guide their selection decision. Aroni’s conclusions are justifiable because it is indeed practical

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 Effect of Cognitive Biases on Teacher Investment Decision in Vihiga Sub-county

that there is a certain difficulty to perceiving financial accounting information by individual investors. However,
contextualizing the general investors into a particular group, there is the possibility that teachers in this case,
may find financial reporting difficult not only to access but also excessively lengthy and cumbersome to read,
understand and perceive which represents an impediment to investment decision. Ndiege (2012) in an effort to
determine factors influencing investment decision among teachers in Kisumu municipality, using descriptive
survey design on primary data, analysed through factor analysis established that teachers in Kisumu
Municipality have low financial literacy. Although many of them rated equity stocks as an investment just like
others, a majority of them would prefer investments in other asset classes such as real estate. Only a small
percentage (28%) of the target population had invested in the stock market.
Whereas existing literature concurs on the fact that financial literacy possesses significant influence on
investment decision of individual investors, it is variant on the relationship between literacy and investment
decision and on whether this influence is statistically measurable which would further explain how financial
literacy influences investment decision. This research therefore intended to assess the effect of financial literacy
on investment decision among Vihiga Sub-county teachers.

II. Literature Review

2.1 Prospect Theory
According to behavioural finance, investors do not always behave rationally. By using cognitive
shortcuts determined by themselves, they act under the influence of various psychological factors (Sommer,
2011). Recent literature has emphasized on social factors in general and behavioural factors, psychological
biases and personality traits, in particular that affect investors’ decisions. According to Ritter (2003), behavioral
finance is based on psychology which suggests that human decision processes are subject to several cognitive
illusions. Ideally this means that since time and cognitive resources are limited, humans cannot analyze the data
the environment provides us with optimally. Instead, natural selection has designed minds that implement rules-
of-thumb in the form of algorithms, heuristics or mental modules selectively to a subset of cues. Ritter (2003)
defines heuristics as rules of thumb which make decision making easier, especially in complex and uncertain
environments, by reducing the complexity of assessing probabilities and predicting values to simpler judgment.
Prospect theory was therefore birthed by Kahneman, and Tversky in 1979 as a psychologically realistic theory.

2.2 Prospect theory of Mental Accounting.

Prospect theory is considered an approach to decision-making since it focuses on subjective decision-
making influenced by the investors’ value system. People tend to under-weigh probable outcomes compared
with certain ones and people response differently to the similar situations depending on the context of losses or
gains in which they are presented (Kahneman & Tversky, 1979). Prospect theory describes some states of mind
affecting an individual’s decision-making processes including regret aversion, loss aversion and mental
accounting (Waweru et al., 2003). It states that humans have a tendency to place particular events into mental
compartments, and the difference between these compartments sometimes impacts our behavior more than the
events themselves for example the hesitation to sell an investment that once had monstrous gains even though it
now realizes modest gain such that during an economic boom, people get accustomed to healthy gains and
money-making schemes such as gambling. When the market opens up to a new investment opportunity, they're
more hesitant to dispose even at the smaller profit margin. They create mental compartments for the gains they
once had, causing them to wait for the return of that gainful period.

2.3 Financial Literacy and Investment decision.

Classical economic and financial theories often assume the rationality of all investors in the stock
market by presuming perfect knowledge about trading and investment decision making is exhibited by them and
therefore, by assuming rationality, postulating the concept of efficient markets where all investors are fully
informed and acquainted with investment opportunities (Loomes,1982). However, post-classical economics
disagree with this premise specifically because it fails to address the developing shortcomings witnessed in the
markets (Thaler, 2005). Thaler (2005) in his paper, Mental Accounting and Consumer Choices, defines a
rational investor as a one that always updates his beliefs in a timely and appropriate manner on receiving new
information and makes choices that are normatively acceptable. Investors may be inclined toward various types
of behavioural biases, which lead them to make cognitive errors ( Matthew, 2017). One major challenge
witnessed in the mordern-day markets is the diminishing liquidity levels occasioned by minimal investor
participation according to the World Economic Forum report on Stock market activity published in 2017. The
economic model fails to explain why large proportions of the population on average choose not to participate or
invest in the stock market. In Kenya, individual investment market share has declined to a near bottom 5.5%,
over the last four years, from a gross average of 18% in 2007 despite there being a considerable number of

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 Effect of Cognitive Biases on Teacher Investment Decision in Vihiga Sub-county

potential investors with substantial amounts of disposable income (CMA Rating, 2017). A majority of the
investors in this regard are institutional foreign investors who exhibit this behaviour on election year cycles.
Globally, research by the Organisation for Economic Cooperation and Development (OECD) indicates that an
average of 72% of teachers have no clue about investing in equity securities. According to its report in 2005,
teachers will not be able to choose to invest or make the right investment choice for themselves, and may be at
risk of fraud, if they are not financially literate. However, in trying to counter this trend, a research conducted by
UW-Madison’s shows that more than 70 percent of grade 12 teachers in America indicated they were willing to
participate in formal financial education training. Areas for which teachers felt least prepared were risk
management and insurance, saving and investment, financial responsibility and decision making, and credit and
debt. For emerging economies, financially literate individuals can help ensure that the financial sector makes an
effective contribution to real economic growth and poverty reduction (Gay, 1987). Teachers as part of the
working and moderate income earning community in Kenya could be susceptible to financial literacy
deficiency.
Merikas et al (2003) conducted a survey of the factors influencing informed individual investor
behaviour in the Greece stock exchange and the variables rated as most important are classic wealth
maximization criteria such as expected corporate earnings, condition of the financial statement or firm status in
industry. Speculative factors such as get rich quick schemes, recent price movement in the firm stock and
affordable price significantly influence investors’ decisions (Merikas et al, 2003 and AlTamimi, 2004).
Agreeing with the above documentations, Chong and Lai (2011) explain that in making an investment decision,
rational individuals are likely to seek information on performance as well as the behaviour of other investors.
Bennet et al. (2011) sought to identify various factors that influence retail investors’ attitude towards investing
in equity stock markets. They applied a structured questionnaire to retail investors in Tamil Nadu, India.
Collected data were analyzed through descriptive statistics according to the test results, out of the total 26
variables, it was found out that five factors; investors’ tolerance for risk, strength of the Indian economy, media
focus on the stock market, political stability and government policy towards business had a very high influence
over retail investors’ attitude towards investing in equity stocks.
Geetha and Vimala (2014) investigated the effect of demographic variables on the investment decisions by
performing a sample survey method in Chennai, India. The analysis results showed, from the investors’ point of
view, changes in demographic factors such as age, income, education, and occupation had an influence in the
investment avenue preference. Deducting from this, it is imperative that education is a paramount picture
bringing into focus the important aspect of literacy. In Kenya, previous work by Waweru, (1998), Wera,
(2006), Mbaluka, (2008) and Nyaribo,( 2010) enumerate behavioural factors such as herd behavior, regret
aversion over confidence, mental disregard of fundamental estimates accounting information, representativeness
and anchoring as having to account for investors decision making. From this research we get that accounting
information, which is a part of financial literacy is deficient. These researches however present a more general
view to individual retail investors. Teachers are however considered the custodians of literacy in mordern day
society.
III. Methodology
A correlational design was used to investigate the research hypothesis. Correlational designs are used
when researchers are interested in establishing relationships between two or more variables. Mugenda and
Mugenda (1999) indicated that correlational designs involve discovering both the direction and degree of the
associations among variables without manipulating the variables. The target population consisted of all trained
teaching workforce serving in the 28 secondary institutions according to the Director of Education (DEO)
Vihiga (2017). Stratified sampling was used to identify the proportionate size of each cadre of respondents in
the target schools. Oso and Onen (2009) define stratified sampling as a sampling technique that identifies the
strata in the main population and then selects from each stratum at random to form the sample. The reliability
was measured so as to find out the degree to which the measuring items would give similar results over a
number of repeated trials. A test-retest method was used to estimate the degree to which the same results could
be obtained with a repeated measure of accuracy of the same concept. A Cronbach’s Alpha of 0.7 was obtained.

3.1 Results
3.1.1 Respondents’ Demographic
A sample of 102 teachers was targeted and the same number of questionnaires was issued to teachers in their
schools. 96 questionnaires were received back of which 3 were invalid because more than 50% of the questions
were unanswered. This reduced the number of valid questionnaires to 93 representing 91% response rate.
Variable Frequency Percent
Age
Below 40yrs 69 74.2
40-50yrs 19 20.4
Above 50yrs 5 5.4

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 Effect of Cognitive Biases on Teacher Investment Decision in Vihiga Sub-county
Average Income Level 100
Below Sh.30,000 58 62.4
30,000 - 50,000 24 25.8
50,000 – 60,000 7 7.5
Above sh.60,000 4 4.3
Preferred income to invest 100
0 – 10% 37 39.8
11 – 20% 29 31.2
21 – 30% 7 7.5
Over 30% 20 21.5
100
Source: Research Data, 2018.

Table above illustrates that majority (74.2%) of the respondents were of the age category of below
40yrs of age, while 20.4% were within the age bracket of 40-50 years old. The rest (5.4%) fell within the age
bracket of above 50yrs of age. This finding illustrates that a majority of the teaching workforce were yet to
attain the age of 40. 62.4% of the respondents were earning below sh.30,000 , 25.8% were earning between
sh.30,000 to sh.50,000, 7.5% between sh.50,000 and sh. 60,000 and 4.3% earning above sh.60,000. 39.8% of the
respondents prefer to invest 0-10% of the income, 31.2% prefer to invest 11-20%, and 7.5% prefer to invest 21-
30% while 21.5% of the respondents prefer to invest over 30% of their income. These results indicate total
normalcy and rationality in teachers’ investment expectations. They indicate that teachers are aware of how
returns on investment on the stock market would come about and the duration they would expect to last.
Generating such returns as anticipated by teachers is totally possible and especially with the expected time
period.

3.2 Correlations between coefficients of Independent variables and Investment Decision.

Financial Literacy Investment Decision
Financial Literacy Pearson Correlation 1
Sig. (2-tailed)
Investment Decision Pearson Correlation .208**
Sig. (2-tailed) .000 1
Note: **. Correlation is significant at the 0.01 level (1-tailed).
Source: Research Data, 2018.

It was observed that there exists a positive relationship of 0.208 between financial literacy of teachers
and investment decision. This table also noted that this relationship was statistically significant since p < 0.01 (p
= 0.000). This leads to the assessment that that financial literacy, though not strongly, positively influences
investment decision among teachers in Vihiga sub-county. So much such that the more financially literate
teachers are the more they are better placed to make informed investment decisions. Sawatzki (2017) noted that
teacher financial literacy was a significant influence on personal investment decision. He observed a quantum
percentage (75%) of teachers in Australia would be willing to make their own personal decision as regards to
investment into the stock market. This led to his conclusion that the more financially literate teachers are the
more likely to participate in investment into the stock market and by extension be able to teach financial
management skills to their students as pertaining to his research topic.
In Toor (2014) research, 75% of the respondents that were financially literate believed that there was
not sufficient investor education therefore hampering financial literacy and by extension investment decision.
Therefore this result is not much different from the previous studies. The researcher therefore rejects the null
hypothesis that stated there is no significant effect of financial literacy on investment decision among teachers in
Vihiga Sub- County. The result indicates that there is indeed significant relationship.

3.3 Regression Analysis between Coefficients of Independent variable and the Dependent variable.
Financial Literacy and Investment decision are investigated in this research. Regression analysis was
used so as to compute the relative contribution of financial literacy to investment decision.

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 Effect of Cognitive Biases on Teacher Investment Decision in Vihiga Sub-county

TABLE: Results of Regression for the Relative Contribution of Financial Literacy

Coefficients
Model Unstandardized Standardized t Sig.
Coefficients Coefficients

B Std. Error Beta

1 (Constant) 2.477 .395 6.278 .000

Financial Literacy .382 .075 .304 5.116 .000
Source: Research Data Analysis, 2018

According to the regression model established, taking financial literacy constant at zero, the financial
performance as a result of this will be 2.477. This therefore implies that financial literacy has a positive
relationship to investment decision where a unit increase in investment decision will yield a 0.382 increase in
financial literacy while contributing to 30.4% contribution to investment decision.

IV. Discussion
The case for teachers, as per the study findings, shows a significant influence by financial information
while making decisions to invest in shares. Notably, Vihiga Sub-county teachers, in dealing with the stock
market place high premium on financial information. Despite the experience of low financial literacy levels in
the Kenyan capital market, teachers still appreciate the significance of the financial reports. Kiplangatet al.,
(2010) proposes that investors are guided by the available information to make a decision to invest in shares,
and the current finding supports the proposition. These results conform to Aroni (2012) who established a
positive correlation coefficient showing financial information relationship to individuals decision to invest in
shares of firms listed in NSE. Sawatzki (2017) noted that teacher financial literacy was a significant influence
on personal investment decision. He observed a quantum percentage (75%) of teachers in Australia would be
willing to make their own personal decision as regards to investment into the stock market. This led to his
conclusion that the more financially literate teachers are the more likely to participate in investment into the
stock market and by extension be able to teach financial management skills to their students as pertaining to his
research topic.

V. Conclusions and Recommendations.

Teachers in Vihiga Sub-county do not have sufficient information as regards to investment which could
influence their propensity to invest. It was found that though financial literacy effects decision to invest, the
percentage levels of financially literate teachers were low.
The researcher makes the following recommendations for improvement and further research that
should be done to improve teacher capability to make investment decisions. For improvement on the availability
of financial information, the Capital Markets Authority should strengthen their sensitization mechanism to
ensure that the labour force, for example the teachers in this case, in the suburban and rural counties of this
country has access to sufficient financial information and better understanding of Stock Market investing.
Teachers possess various loopholes for information dissemination. More workshops and seminars can be
organized in a quest to lure the teachers to invest in the stock market specifically targeting the younger crop of
teachers who are new in the workforce. Finally, financial literacy skills need to be embedded in teacher training
to help them manage their personal finances better.

Acknowledgement.
I acknowledge Mr. Peter K Ndichu for his invaluable insight on the various aspects of behavioural finance.

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Mr. Jesse Isiaho Ludenyo. " Effect of Financial Literacy on Teacher Investment Decision in
Vihiga sub-county, Kenya." IOSR Journal of Business and Management (IOSR-JBM), Vol. 21,
No. 5, 2019, pp. -.32-37

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