Behavioral Biases and Real Estate Bubble Formation in Kenya: A Behavioral Finance and Neuroeconomic Perspective

Abstract

Purpose: This study explores how behavioral and psychological tendencies, cultural influences, and emerging neuroeconomic patterns shape real estate market dynamics in Kenya. It critically examines the inadequacy of traditional rational investor models, focusing instead on how biases such as herding, overconfidence, optimism, and anchoring contribute to speculative real estate price surges within Kenya’s unique social and institutional context.

Methodology: A multifaceted research strategy was adopted, integrating quantitative surveys grounded in established psychometric tools, field-based experimental simulations of real estate transactions, qualitative interviews with key market participants, and rigorous econometric analysis. Time-series models—specifically the Phillips–Shi–Yu (PSY) test and log-periodic power law (LPPL)—were applied to detect speculative pricing patterns. Complementary neuroeconomic indicators, including reaction times and biometric responses, were used to gain insight into decision-making under cognitive pressure. The study's data was gathered from Nairobi, Mombasa, and surrounding urbanizing areas such as Kitengela and Ruiru.

Findings: Results reveal that herding behavior is widespread, often driven by peer influence and reinforced by dramatic media coverage. Overconfidence and unwarranted optimism are especially common among new and younger investors, leading to risk-prone behavior. Many participants also rely on outdated price benchmarks or reference nearby high-end developments, contributing to persistent anchoring. Econometric findings confirm two distinct periods of bubble activity—in 2015–2018 and in 2021—both coinciding with heightened psychological bias indicators. Physiological data from experiments suggest that emotional stress and cognitive shortcuts significantly influence investor choices, particularly in competitive or uncertain market conditions.

Unique Contribution to Theory, Practice, and Policy: This research enriches existing behavioral finance literature by incorporating neuroeconomic perspectives within the context of an emerging African economy. It provides practical recommendations for market monitoring, proposing the inclusion of behavioral signals in early-warning frameworks. It also highlights the need for stronger investor education, enhanced market transparency, ethical media reporting, and investment in localized neuroeconomic research infrastructure. The study offers a deeper understanding of how socio-cultural and psychological factors shape speculative real estate dynamics, presenting a model better suited to the realities of property markets in the Global South.