Abstract:
Heuristic factors play an undeniable role in influencing individuals' decisions, including
investment decisions. They have emotional impact on all investors and vary subject to the
investor’s nature which affects the financial performance of the firm. Investors have a
specific way of intellectual and feeling which affects their actions when making investment
decisions. These influences are called psychological or behavioral heuristics. Using cross-
sectional data from 382 respondents of small and medium enterprises located in Nairobi
County, the research evaluated the direct influence of Representativeness Heuristic on the
financial performance of the SMEs in Nairobi County. In addition, the research scrutinized
the mediational effect of Investment decisions on the relationship between
Representativeness heuristic and the financial performance of the said SMEs. The study is
guided by Heuristic theory and Modern portfolio theory. The study used an explanatory
research design and arranged the samples into strata. Data collection was done through
self-administered, structured questionnaires and elements were grounded on a 5-point
Likert scale after which data analysis was done using descriptive and inferential statistics.
The study hypotheses were tested with the use of multiple regression models and Hayes
process macro. The results showed that Representativeness Heuristics significantly predicts
SME’s financial performance (β= .169, p< .05) and this relationship is partially mediated
by Investment decisions (β =.285, p < .001, CI=0.023, 0.099). Theoretically, the study
supported the incorporation of different key dimensions of heuristic factors and investment
decisions to achieve the financial performance of SMEs. Finally, there is a need to
undertake similar studies covering other geographical locations to make a generalization of
this study.
