Behavioural Finance and Investment Performance of SMES in the Federal Capital Territory (FCT)

This study examined the effect of Behavioral Finance on Investment Performance of SMEs in the Federal Capital Territory. Specifically, the study examined the effect of herding, heuristics, and prospect factors on investment performance of SMEs in the Federal Capital Territory.

The population of the study was 38,003 owners and managers of SMEs in the FCT. A sample size of 436 was selected using the Taro Yamane formula for sample size determination. Simple random sampling was employed in selecting the respondents. Data was collected through primary sources using a structured questionnaire on a five-point Likert scale. Partial Least Squares Structural Equation Modeling (PLS-SEM) was employed to analyse the data and test hypotheses.

The results show that herding has an insignificant negative effect on the investment performance of SMEs in the FCT. The study found heuristics to have a positive and significant effect on investment performance of SMEs in the FCT, while prospect factors exhibited an insignificant negative effect on investment performance of SMEs in the FCT. The study concludes that Behavioral Finance has a significant effect on investment performance of SMEs in the Federal Capital Territory.

The study recommends that SME owners and managers should resist the urge to simply follow the crowd in their investment decisions and instead cultivate a habit of independent thinking. SME owners and managers should develop and utilize simple, effective decision-making rules that work for their business context. For example, they may create a checklist of key financial indicators to review before making investment decisions or establish clear thresholds for return on investment that guide their choices. Furthermore, SME owners and managers, when evaluating investment opportunities, should be aware of their natural tendency to overweigh potential losses compared to potential gains. To counter this, they should adopt a long-term perspective on their investments and focus on overall portfolio performance rather than individual investment outcomes.