Risk Perceptions and Financial Decisions of Individual Investors

Standard finance theory portrays investors as rational utility maximisers. Persisting market anomalies and observed investor practice, however, have led to widespread recognition that the fundamental axioms of rationality are often violated. In response to the limitations inherent in standard theory, the Behavioural Finance approach relaxes the rationality assumption and takes account of psychological influences on individuals’ decision-making processes. Adopting the behavioural approach, this thesis, which includes two empirical studies, examines why, and to what extent, investors depart from rational or optimal investment practices. The thesis examines the effect of Myopic Loss Aversion (MLA) suggested by Benartzi and Thaler (1995) as a response to the Equity Premium Puzzle highlighted by Mehra and Prescott (1985). While previous studies are almost exclusively based on experiments in a laboratory setting, this approach provides more compelling empirical evidence by investigating the effects of MLA on real individual investors’ portfolio allocations through the use of the Dutch National Bank Household Survey. For the first time, the concept of MLA is identified through the interaction of two separate effects, firstly, individuals’ myopia, reflected in portfolio evaluation and rebalancing frequencies, and secondly, loss aversion. The thesis finds that individuals who are less affected by MLA invest more in risky financial assets. Further, individuals who are less myopic increase their share of risky assets invested in their financial portfolios over time, although this is unrelated to their loss aversion. These findings support the prediction of MLA theory that short investment horizons and high loss aversion lead to a significantly lower share of risky investments. In summary, the high equity premium can be explained by the notion of MLA. If individuals evaluate their investment performance over the long-term, they perceive much smaller risks relative to stockholding returns; consequently, they will be prepared to accept smaller equity premiums. The findings suggest possible interventions by policy makers and investment advisors to encourage individuals to remain in the stock market, such as providing long-term investment instruments, or restricting evaluation frequency to the annual reporting of investment performance. In response to the stockholding puzzle (Haliassos and Bertaut, 1995), this thesis also investigates individuals’ stock market returns expectations and their varying levels of risk aversion. Previous studies find that individuals’ heterogeneous stock market expectations determine variations in their stockholdings. The thesis accounts for the effect of risk aversion on stock market expectations, as well as on stockholding decisions. Additionally, the causality issue as between individuals’ expectations and stockholding status is controlled. The thesis finds that more risk averse individuals hold lower stock market expectations, and that the stock market return expectations of more risk averse individuals affect their stock market participation decisions negatively. The portfolio allocation decisions of individuals who already hold stocks are only affected by their expectations, with risk aversion being no longer significant. The thesis argues that persistent risk aversion effects cause individuals to hold pessimistic views of stock market returns, thus contributing to the enduring stockholding puzzle. The thesis reinforces existing perceptions that individuals in the real world may not make fully rational decisions due to their judgments which are based on heuristics and affected by cognitive biases. Individual investors often fail to maximise their utility given their preferences and constraints. Consequently, this thesis draws attention to the possible role of institutions, policy makers, and financial advisory bodies in providing effective interventions and guidelines to improve individuals’ financial decisions

xDelia final report: emotion-centred financial decision making and learning

xDelia is a 3-year pan-European project building on the knowledge, skills, and competences of seven partner organisations from a variety of research disciplines and from business. The principal objective of xDelia is to develop technology-enhanced learning approaches that help improve the financial decision making of investors who trade frequently using an electronic trading platform. We focus on emotions, and how they affect maladaptive decision biases and trading performance. Our earlier field work with traders has shown that the development of emotion regulation skills is a key facet of trader expertise. For that reason we consider expert traders our benchmark for adaptive behaviour rather than normative rationality. Our goal is to provide investors with the tools and techniques to develop greater self-awareness of internal states, increase their ability to reflect critically on emotion-informed choices, develop emotion management skills, and support the transfer of these skills to the real-world practice setting of financial trading. This report provides a comprehensive overview of what xDelia is about and what we have achieved over the life of the project. In the sections that follow, we explain the decision problems investors are faced with in a fast paced environment and the limitations of traditional approaches to reduce cognitive errors; introduce an alternative, technology-enhanced learning approach of diagnosis and feedback, skill development, and transfer; describe the learning intervention comprising twelve autonomous learning elements that we have developed; and present evidence from thirty-five studies we have conducted on learning effects and stakeholder acceptance

The Influence of Frame Dependence on Investment Decisions made by Listed Property Fund Managers in South Africa

Behavioural finance describes investors’ and managers’behaviour in terms of their interactions, andhow their behaviour subsequently influences financial and capital markets. One aspect of behavioural finance, frame dependence, reflects the fact that decision-makers may model decisions about problems using subjective frames. Such decisions may lead to errors in judgement. This study’s objective was to determine whether frame dependence influences listed property fund managers in South Africa’s property investment decisions.Therefore, the study examinedquestionsrelating to the disposition effect and loss aversion,as well asfactors influencing selling decisions and the time and difficulty involved in making buying and selling decisions. The study surveyed the fund managers of all South African-based property funds listed on the Johannesburg Securities Exchange (JSE). Non-parametric statistical measures were used.The resultsreveal the presence of the disposition effect and a strong desire to cut losses as a motivating factor to sell a property. In the context of the difficulties associated with, and time spent in, buying new properties, it appears that South African property fund managers are, to some extent, lossaverse. This study recommends that fund managers be alerted to the presence of frame dependence in their decisions, so that they canincorporate it in their normative investment strategies.They need to know that they are loss averse in their investment decision-making, resulting ina possible loss of perfectly positioned, profitable investment opportunities. This study expands the body of knowledge surrounding property investment decision behaviour in an emerging market

Are Institutional Investors Part of the Problem or Part of the Solution?: Key Descriptive and Prescriptive Questions About Shareholders

Over the last twenty years, institutional investors have owned an increasing share of public equity markets — more than 70 percent of the largest 1,000 companies in the United States in 2009, for example. Over the past two years, in response to failures of some boards of directors and business leaders, shareholders, including institutional investors, have been given increased powers to participate in — or have disclosures about — discrete spheres of governance in publicly held corporations. Moreover, during this same period, and in multiple jurisdictions, there have been increasing calls from both the public and private sectors for institutional investors to play a broad “stewardship” role by “engaging” with investee companies to “help achieve long-term sustainable value” and to help curb excessive risk taking seen as a factor in the financial crisis. But with these shifts in market and legal powers have come questions about institutional investors which are similar to those raised in the recent past about the corporations in which they invest. These questions relate to goals, strategies, governance, performance and accountability and, importantly, the separation of ownership and control (agency problems). They boil down to a bedrock query: do investors have the capacity to perform the role now expected of them? Institutional investors in this paper include: pension funds, mutual funds, insurance companies, hedge funds and endowments of non-profit entities like universities and foundations

Psychological correlates of investor risk

The present study explores the efficacy of a standardized psychological test known as Rotter\u27s Internal/External Locus of Control Scale in predicting investor\u27s level of risk aversion

KNOWLEDGE AND POWER IN MEASURING THE SUSTAINABLE CORPORATION: STOCK EXCHANGES AS REGULATORS OF ESG FACTORS DISCLOSURE

“Sustainability” surely figures amongst the most discussed themes by corporate lawyers and policymakers at the global level in the last years. In particular, much attention has been devoted to the performance of firms managed in a “sustainable” way and on how to design an ESG (environmental, social, governance) factors disclosure framework that provides meaningful information to investors. At the same time, policymakers around the world believe that non-financial factors disclosure would foster a reallocation of capital to “sustainable” firms, contributing to the solution of some of the most pressing issues of our time. However, what should be measured and how to measure it is not a merely technical issue but depends on political choices: the concept of sustainability should be declined as plural. In order to assess which concept of sustainability is embedded into indicators it is necessary to understand the institutional structures and dynamics of the single reporting frameworks, and which issues they purport to disclose. This paper tackles these issues providing the first academic analysis of the ESG factors disclosure framework elaborated by the Sustainable Stock Exchanges Initiative – a project developed since 2009 under the aegis of the United Nations – and the World Federation of Exchanges – the stock exchanges and clearing houses trade association. In order to understand how and why the analyzed disclosure framework was produced, the paper develops an original conceptual framework that takes into account the nature of indicators as technologies of global governance, the “four actors” model advanced by Büthe and the role of transnational financial associations in the production of global governance rules. Using this theoretical framework, three distinct contributions are made. First, the paper provides a historical and political analysis of this new framework that is able to explain its adoption and implementation, disentangling ESG factors disclosure from corporate social responsibility and socially responsible investment. Second, it analyzes how the articulated structure of the actors involved in the production of the framework determined its content and the underlying concept of sustainability. Finally, it analyses why the structure of the actors involved and the specific conception of ESG factors disclosure hinder full and accurate information disclosure and narrow down the concept of sustainability embedded into the indicators. While the analysis is specific to the Sustainable Stock Exchange Initiative and the World Federation of Exchanges indicators, the theoretical model can be deployed to approach other sustainability frameworks as well

A strategic perspective on the emergence and evolution of e-Banking in Saudi Arabia

The aim of the thesis is to look at the emergence and evolution of e-banking in Saudi Arabia, with particular emphasis on the processes of how banks implement e-banking to build their capabilities and create new value strategies. The research process focuses on understanding (1) how banks implement e-banking to build their capabilities as well as to create new value strategies, (2) how e-banking capabilities have been built, and (3) the role played by e-banking in shaping the strategic direction of banks. This requires understanding of a variety of aspects (i) the value created by e-banking products and services within different banks, (ii) the process of e-banking development within the different banks, (iii) how banks approach e-banking products and services, and (iv) how the banks align the demand and supply factors surrounding e-banking products and servicesThe theoretical approach blends inputs from different disciplines relevant to understand and deal with the subject matter of this thesis, including value creation and capability-building literature, technology implementation literature, with particular emphasis on the processes of implementing network technologies and e-businesses, as well as literature on process approaches. The methodological approach makes use of the case study strategy (Yin 2003) as research strategy, a multiple-case embedded design, as research design strategy, and three sources of evidence: (1) a survey distributed to all Saudi Arabian banks, (2) semi-structured interviews, and (3) archival records of e-banking transactions. The main fieldwork is longitudinal and takes place during three rounds: SeptemberOctober 2003, December 2003-March 2004, and December 2005-January 2006.The thesis investigates the emergence and evolution of e-banking at six Saudi Arabian banks: Samba Financial Group (Samba), AlRajhi Bank (AlRajhi), Saudi Investment Bank (Saib), Saudi Hollandi Bank (Hollandi), National Commercial Bank (AlAhli), and Riyad Bank (Riyad). This is followed by an investigation of the emergence and evolution of electronic securities trading systems at the Saudi Capital Market (i. e., Tadawul), providing an external view of the emergence and evolution of ebanking in Saudi Arabia.The analysis of the empirical material implements the theoretical propositions strategy via utilisation of the "sociotechnical constituencies" approach (Molina 1990; 1993) and its associated analytical tools of the "diamond of alignment" (Molina 1995), "alignment web" (Molina 2003) and "dynamic strategy mapping" (DSM) (Molina 2005). The aim is not only to use the approach to reveal how banks build their e-banking capabilities and create new value strategies, but also to test critically the applicability of the "sociotechnical constituencies" approach and its associated analytical tools for understanding e-banking value creation and capability-building strategies.The overall result of the investigation conducted by this thesis suggests that the Saudi Arabian ebanking' constituency-building process shows distinctive processes of sociotechnical alignment by each one of the specific Saudi banks' e-banking constituencies in the study. In addition, the use of Molina's "alignment web" to assess the state of each of the specific e-banking constituency-building processes helps identify the areas of strengths and weaknesses in these processes of sociotechnical alignment. The distinctiveness of development by each sociotechnical constituency is also highlighted by the application of the Molina's "dynamic strategy mapping" (DSM), showing that each constituency has its own combination of strategic ingredients.Although this thesis demonstrates strengths in the areas of logic replication, narrative writing, and validating procedure, in future studies it would be interesting to enhance its theoretical background, chronological structure, and quantitative assessment. This thesis contributes to providing a rich insight into the emergence and evolution of e-banking in Saudi Arabia, particularly at six of eleven Saudi banks as well as the technological systems of the Saudi Capital Market. Such contribution may be used to inform the future alignment strategy pursued by each the Saudi Arabian e-banking constituencies

Players and Arenas

Players and Arenas brings together a diverse group of experts to examine the interactions between political protestors and the many strategic players they encounter, such as cultural institutions, religious organizations, and the mass media—as well as potential allies, competitors, recruits, and funders. Discussing protestors and players as they interact within the “arenas” of specific social contexts, the essays show that the main constraints on what protestors can accomplish come not from social and political structures, but from other players with different goals and interests. Through a careful treatment of these situations, this volume offers a new way to approach the role of social protest in national and international politics

The behaviour of individual investors in Malaysia: a governance perspective

Despite the many benefits that good governance brings to investors, academics contend that individual investors have no significant role to play in governance as it is economically unviable and too time consuming for them. On the other hand, regulators encourage and seem to expect individual investors to be governance interested, especially in exercising their ownership rights and making use of governance redress mechanisms whenever the need arises. Are such expectations of how these investors should behave at all reasonable? More importantly, there is anecdotal real-life evidence that at least some individual shareholders in Malaysia do play a role in governance such as attending AGMs. If, as assumed by academics that it is not viable for them to do so, what is the logic and/or motivations behind such observed behavioural tendencies? This study explores the many possible ways by which investors take governance into account (including harder-to-observe treatments – e.g. governance featuring in the form of share investment evaluation criteria). Yet unidentified, important actual motivations and justifications for all reported governance-related tendencies are studied as well. The actual relevance and also prevalence of such treatments and reasonings are largely unexplored in the empirical literature. Essentially, the study considers all governance-related attributes (both firm-level and country-level) that are potentially important to individual investors as well as all governance-related actions/tendencies exhibited by them throughout the typical share investment cycle. Each action/tendency is viewed and made sense of (i) as an integrated part of the sets of behaviours identified, (ii) within the governance environment and investment context where it takes place and (iii) from the standpoint of individual investors. Individual investors‘ relative propensities toward considering governance and/or undertaking governance-related actions are found to be (i) affected by, and are thus rational responses to, the governance-related institutional, environmental, cultural constraints they face and (ii) influenced by their personal investment inclinations, stylistics and preferences such as their primary investment strategies. These entail a number of implications that inform both policy and practice