Determinants of Individual Investor Behaviour: An Orthogonal Linear Transformation Approach

Expected utility theory views the individual investment decision as a tradeoff between immediate consumption and deferred consumption. But individuals do not always prefer according to the classical theory of economics. Recent studies on individual investor behavior have shown that they do not act in a rational manner, rather several factors influences their investment decisions in stock market. The present study considers this theory of irrationality of individual investors and investigates into their behaviour relating to investment decisions. We examine whether some psychological and contextual factors affect individual investor behaviour and if yes which factors influences most. Extrapolating from previous literature on economics, finance and psychology, we surveyed individual investors to find what and to what extent affects their investment behaviour. Our conceptual analysis, empirical findings and the perspective framework that we have developed in the present study, provide five major factors that can influence individual investor behaviour in Indian stock market. The findings can be useful in profiling individual investors and designing appropriate investment strategies according to their personal characteristics, thereby enabling them optimum return on their investments.Individual investor, Psychological biases, Investment behaviour, Indian stock market, Behavioural economics.

A Life Cycle Approach to Investor Protection. ECMI Working Paper No. 1/September 2014

The market for investment products, including both securities and investment funds, is fraught with difficulties for consumers in terms of the ease of comparing products, trust in suppliers and consumer satisfaction. A comprehensive approach to investor protection, developed around the lifecycle of a financial product, may offer the investor greater protection during an investment’s life span. This paper proposes a new approach to investor protection, building on a review of major market failures affecting the origination, distribution and sale of financial products and based on a review of the relevant scientific literature and country experiences. The application of a ‘know-your-product’ principle at origination, a narrower ‘default rule’ for best execution and an ex-ante distinction between advice and ‘information-only’ services are among the options discussed in this paper to enhance the investor protection framework over the lifecycle of a financial product

Risk analysis and solvency impact of the exposure of portuguese insurance and pension funds sector to the property market

Mestrado em Ciências ActuariaisA origem e consequências da crise financeira com início no verão de 2007 acentuaram as preocupações relativas aos impactos da exposição a ativos imobiliários na estabilidade do sistema financeiro. No âmbito da supervisão de empresas de seguros e fundos de pensões a ênfase centra-se na possível influência destes ativos na aferição das posições financeira e de solvência, e capacidade de cumprir responsabilidades por parte destas entidades. Este texto é o relatório de estágio curricular realizado na Autoridade de Supervisão de Seguros e Fundos de Pensões. O estudo subjacente, realizado em ambiente de Solvência II, visa a análise do investimento em ativos imobiliários pelas entidades supervisionadas, para deste modo salvaguardar os tomadores de seguros e beneficiários dos potenciais impactos deste mercado cíclico, gerador de risco sistémico e bolhas financeiras.The origin and consequences of the financial crisis bursting in the summer of 2007 accentuate the concerns regarding the impacts of exposure to property linked assets in the stability of the financial system. In the scope of supervision of insurance companies and pension funds the emphasis lays upon the possible influence of these assets in the perception of such undertakings' financial and solvency positions, and capability to cover liabilities. This text is the report of a curricular internship developed in the Portuguese Insurance and Pension Funds Supervisory Authority. The underlying study, performed in the Solvency II environment, targets the analysis of property related investments of the supervised entities, aiming to protect policyholders and beneficiaries from the potential impacts of this cyclical market, generator of systemic risk and financial bubbles

A behavioral interpretation of the nav discount puzzle in listed real estate companies

The NAV discount is a long standing puzzle in the listed real estate context. In this paper we extend the existing literature’s rational and noise trader explanations by exploring the influence of specific irrational behaviors. Based on behavioral biases identified in the stock and real estate markets, we hypothesize the existence of a relationship between lagged NAV growth and the NAV discount. The findings provide initial evidence of trend-chasing behavior between the dual real estate markets. The results have broader implications for the perception of the relationship between public and private real estate markets

Essays in capital markets

Thesis (Ph.D.)--Massachusetts Institute of Technology, Sloan School of Management, 2002.Includes bibliographical references (p. 136-141).(cont.) Slow information diffusion can cause return momentum. Institutions are thought to be more informed than individuals, and should eliminate return predictability. However, higher institutional ownership is associated with more momentum. Therefore, institutions either herd on returns or can have information before individuals. I find evidence of the latter. However, the effects are economically small, suggesting that aggregate data obscures differences between institutions. I divide institutions by trading aggressiveness. Aggressive institutions are more responsive to recent returns, and a strategy mimicking their trades generates even better performance. This confirms that some investors are more informed than others, but do not eliminate return predictability.This thesis consists of three chapters, each about a separate aspect of how investors respond to information in equity markets. The first chapter concerns news and stock returns. Using a comprehensive database of headlines about individual companies, I examine monthly returns following public news. I compare them to stocks with similar returns, but no identifiable public news. There is a difference between the two sets. I find strong drift after bad news. Investors seem to react slowly to this information. I also find reversal after extreme price movements unaccompanied by public news. The separate patterns appear even after adjustments for risk exposure and other effects. They are, however, mainly seen in smaller, more illiquid stocks. These findings support some integrated theories of investor over- and underreaction. The second chapter is joint work with Richard Frankel and S. P. Kothari. Models based on psychology can explain momentum and reversal in stock returns, but may be overfitted to data. We examine a typical basis for these models, representativeness, in which individuals predict the future based on how closely past outcomes fit certain categories. We use accounting performance to mimic possible investor-defined categories for firm performance. We test the idea that investors predictably bias their expectations about future operations by using these categories. We find little evidence that the sequence or trend of past accounting performance is related to future returns, and is therefore unlikely to bias investor expectations. The third chapter concerns how informational advantage differs between institutional investors.by Wesley S. Chan.Ph.D

Business Angels and Value Added: Does it Affect New Venture Performance?

PURPOSE. Business angels are often the first external source from which entrepreneurial ventures can secure financing. In addition to providing financial capital, business angels are known for their extensive value adding involvement in the portfolio ventures. This research seeks to map the effects of value added by business angels to the performance of new ventures in Sweden. METHODOLOGY. Using a dataset of 41 Swedish ventures backed by business angels, this master thesis employs a linear regression analysis to evaluate the effects of four value adding roles; the sounding board and strategic role, resource acquisition role, supervision and monitoring role, and mentoring role; to the entrepreneur’s perceived performance of their firm. FINDINGS. The study’s findings conclude there is a significant relationship between value added and new venture performance. The data provides supporting evidence of a positive effect of the sounding board and strategic role, as well as resource acquisition role, on performance. In contrast, supervision and monitoring was found to have a negative effect on venture performance and mentoring had no significant effect in either direction. IMPLICATIONS. The results suggest that entrepreneurs and business angels could benefit from better communication of value added expectations. The data further implies that certain value adding roles have a stronger effect on performance than do others. CONTRIBUTION. Prior empirical studies have not mapped theoretical value added by business angels to perceived performance of the ventures. This paper thus adds insights into the complex value adding relationship between entrepreneurs and their business angels

Behavioural Finance, Options Markets and Financial Crises: Application to the UK Market 1998-2010

Behavioural Finance, Options Markets and Financial Crises: Application to the UK Market 1998-2010 By Ian Alan Whitfield Abstract This thesis examines the relationship between behavioural finance and options markets. Particular focus is on the analysis of option prices, implied volatility and trading activity which in turn provides insights into predictability, momentum and overreaction. The thesis is contextualised by a general to specific evaluation of the literature that forms the basis of the behavioural finance paradigm. The review is extended to analyse the extent to which support for the behavioural finance approach has been produced by research on options. Behavioural finance retains an element of controversy as it runs counter to a key pillar of neoclassical finance, the efficient markets hypothesis. Hence the onus is on researchers in this field to produce evidence that refutes the notion of market efficiency and to build models with testable implications that are better able to capture the mechanics of financial markets. This thesis is motivated by a desire to investigate, in detail, key aspects of human behaviour and to test whether they are particularly apparent in options markets. It is important to study the information which can be extracted from options data and to analyse whether this has any predictive power for spot prices. By extension, it is of further interest to examine whether movements in spot prices exert influence on option prices. In particular, aspects of options that capture human behaviour such as pricing of puts relative to calls, implied volatility, trading volume and open interest. The topical relevance of the work is highlighted by thorough application to the UK market during two recent periods of intense financial turbulence; the bursting of the dotcom bubble in 2001 and the liquidity/banking crisis of 2007/8. The empirical work examines the pricing of exchange-traded options relative to theoretical values, the forecasting performance of implied volatility indexes, the ability of trading volume and open interest to capture behavioural aspects of trading behaviour, and momentum and overreaction effects. Hence the work provides a unique and thorough investigation into behavioural finance and options markets in the UK. Results indicate an important role for investor sentiment although they do not necessarily indicate exploitable inefficiencies

A Study on Factors Influencing Investment Decisions of Retail Investors in VUCA World

In this paper, we seek to identify the factors influencing the investment decision of individual investors. Further, in the existing pandemic situation, which will cover the scope of the VUCA environment, it is important to understand the factors influencing investor’s investment decision. For this purpose, we used exploratory factor analysis to group the factors affecting an investor’s investment decision. Based on the findings, we identified four factors influencing investment preferences and the reliability of these factors are supported by strong statistical measure

Psychology and Economics: Evidence from the Field

The research in Psychology and Economics (a.k.a. Behavioral Economics) suggests that individuals deviate from the standard model in three respects: (i) non-standard preferences; (ii) non-standard beliefs; and (iii) non-standard decision-making. In this paper, I survey the empirical evidence from the field on these three classes of deviations. The evidence covers a number of applications, from consumption to finance, from crime to voting, from giving to labor supply. In the class of non-standard preferences, I discuss time preferences (self-control problems), risk preferences (reference dependence), and social preferences. On non-standard beliefs, I present evidence on overconfidence, on the law of small numbers, and on projection bias. Regarding non-standard decision-making, I cover limited attention, menu effects, persuasion and social pressure, and emotions. I also present evidence on how rational actors -- firms, employers, CEOs, investors, and politicians -- respond to the non-standard behavior described in the survey. I then summarize five common empirical methodologies used in Psychology and Economics. Finally, I briefly discuss under what conditions experience and market interactions limit the impact of the non-standard features.

Examining the effects of behavioral biases of investors on Tehran Stock Exchange efficiency using trends and consistency in firms’ financial performance during 1997-2006

The present study investigates the effects of behavioral biases on the efficiency of Tehran stock exchange. In fact, these biases are the mistakes that individuals make while making financial decisions. The methodology of this research is that firms with financial information during 1997 to 2006 that have also been active on the stock exchange have been classified based on two criterions of operating profit/per share and earnings per share, then, the return of these firms was calculated in the first period and compared to their return in the second period. Therefore, it will be clear that the companies’ financial performance trend has been effective on the behavioral biases of investors and consequently on their extreme reactions towards the published information. Therefore, the process of the stock return changes can be predicted in the coming period. As a result, this hypothesis is an evidence of market inefficiency and predictability of financial behavioral theories. On the other hand, this research does not offer sufficient and strong evidences on the effect of consistency in the financial performance process and also the presence of compatible and incompatible signs in companies’ financial performance on the market predictability. Thus, in this case, it is not possible to admit the effect of behavioral biases on the predictability and thus market efficiency. Keywords: behavioral finance, financial performance, behavioral bias, representation, conservatism. JEL Classification: G02, G23, M4