The effect of demographics and personality on investment choice among UK investors - Essay Example

A Study on the Effect of Demographics and Personality on Investment Choice among UK Investors Literature Review Many studies have been undertaken across the world by scholars as well as academicians in the field of behavioral finance to explore what all psychological and demographic factors affect personal investment decisions and choice among alternatives. The study entitled "Risk Taking and Problem Context in the Domain of Losses: An Expected Utility Analysis" by John C. Hershey and Schoemaker in 1980 observes that women investors are more risk averse than men as regards gamble is concerned (Hershey 1980). Another popular study on the gender practices of investing; the researchers remark that both men and women are equally successful in investment decisions and there found no significance difference in investment decisions between male and female groups (Hudgen 1985). In an empirical study among men and women investors in auctions and lotteries undertaken by W. V Harlow and Keith Brown document that men prefer to take more risk than women as regards lottery and auction investments are concerned (Harlow 1990). In another significant study on investment behaviour among individual investors considering their income level William Riley and K Victor Chow attempt to remark that "relative risk aversion decreases as one rises above the poverty level and decreases significantly for the very wealthy. It also decreases with age-but only up to a point. After age 65 (retirement), risk aversion increases with age" (Riley 1992). However, the authors speculate that "education, income and wealth are all highly correlated, so the relationship may be a function of wealth rather than education" (Riley 1992). In a research paper entitled "Gender Differences in Risk Behavior in Financial-Decision-Making: An Experimental Analysis", it is found that regardless of familiarity and framing, costs or ambiguity, women prefer investments with lower risk than moderate and high risk investments avenues (Powell 1997) . The main contention of the study of N. Jianakoplos and Bernasek in 1998 is that women are likely to exhibit more risk aversion characteristics than men when it comes to investment in defined contribution pension assets (Jianakoplos 1998). In the paper "Gender Differences in Risk Taking: A Meta-analysis", the authors conclude that women would like to take less risk than men (Brynes 1999). Schooley Diane K and Debra Drecnik Worden in their study in 2003 document that educated investors, especially those having education higher than secondary level tend to part their hard earned money in risky portfolios (Schooley 2003). The paper also finds that age and proportion of equity holding are positively correlated. In an interesting and popular study entitled "Risk Aversion and Personality Type" by G. Filbeck, Hatfield P. and Horvath P. in 2005, the authors conclude that the relation between personality type and individual ex ante EUT risk tolerance is non-linear in form (Filbeck 2005). Reviewing the aforementioned studies and papers, the present study attempts to explore the effect of demographic and personality traits on individual investment decision in major investment avenues available in the UK. 1.0 Introduction Wealth management in the modern investment market is not confined as a luxury of high net worth individuals. Rather, it is an essential tool for every investor irrespective of gender, age, income and occupation. The increased demand for wealth managers and wealth management theories calls for scientific studies and observations on investment and investment determinants. As the economy of a country progresses, so is the populace of that country not only in terms of income but emotionally and educationally as well. This leads to a systematic approach for all activities, particularly economic activities. Many theories have been propounded by experts in the field of investment to help making investment decisions rationally. These rational investment decision theories stem from standard finance/ neoclassical economics. However, investment decisions by individuals are influenced not only by rational theories but irrational/behavioral theories as well. This acknowledgement develops a new branch of knowledge-behavioral finance- which deals with how investment decisions are taken in line with behavioral aspects of individuals. The present study is such an attempt to seek the behavioral determinants of investment decisions of individuals. The study is undertaken among individual investors in (please select a city of your choice) in the UK. The study takes a sample survey to understand the effect of demographic profile and personality type (risk taking capability) of investors on their investment decisions and choice. 2.0 Background Behavioral finance has become one of the disciplines of great interest to investment firms and wealth management professionals. It is commonly understood as the application of psychological aspects of investors to financial planning and decision making. With the growth and development of UK economy, the need for planned investment among common investors has become a necessity and as a result the demand for wealth management has become phenomenal. Wealth management is the process of channelizing the funds of clients by professional wealth managers in conformity to the formers' financial requirements and choice. The insights of personal financial planning and theories of rational finance are extensively used to make planned personal investment decisions. The rational finance which stems from neoclassical economics postulates that the economic decisions of investors are determined by the principles of perfect self-interest, perfect rationality, and perfect information. This is not going to be a logical view point as described by behavioral finance. Behavioral finance states that people are neither perfectly rational nor perfectly irrational: they possess diverse combinations of rational and irrational characteristics that govern their decisions on investment. This behaviour has been experienced and documented from the practical experience of wealth management professionals and investors. Thus, demographic profile and investor personality cab be key determinants of investor psychology and wealth managers study this aspect in detail to advice their clients in personal investment. At this juncture, the present study aims to explore the effect of investors' demographic profile and personality on investment selection/choice. 3.0 Objectives of the Study (Research Questions) With the background of rational and irrational investment theories, the present research is an attempt to investigate into the problem of influence of demographic and psychological variables on investment choice and decision making among individual investors in the UK. The study seeks to find solutions to the following problems: 1. To assess the degree of influence of demographic and investor personality variables on investment choice. 2. To determine the order of investment preference for each of the variables and their combinations. 4.0 Hypotheses In line with the objectives of the study, the researcher has formulated the following hypotheses: 1. There is no significant difference between the males and females in their choice of investment avenues 2. There are no significant differences in the choice of investment avenues among various investors belonging to different age and income groups, educational qualification, and occupation. 3. There are no significant differences between the investors of different personality types in their choice of investment avenues. 5.0 Research Methodology Methodology is a collective term which includes many aspects such as data collection procedure, sampling design and use of analytical tools. It tells us how a research is systematically undertaken. In this context a distinction is to be made between research methods and research methodology. Research methods refer to the all the available methods for the conduction of a research, whereas research methodology is the way of doing a particular research using methods. In the words of Dr. C. R. Kothari, "research methodology has many dimensions and research methods do constitute a part of the methodology and the scope of methodology is wider than methods" (Kothari 2005). The flowing paragraphs will discuss the methodology applied for conducting the present study. The present study is both qualitative and quantitative in nature. A qualitative research is one which makes use of non-economic/financial data for the purpose of analysis and interpretation whereas a quantitative research makes use of economic data for decision making. For the purpose of present research, both economic as well as non-economic data are to be collected and analyzed to find the solution to the problem. This study is basically a survey research, which collects both primary and secondary data. However, secondary data constitute the main source of data by which majority of the analysis has been done. The data collected are edited and coded to ensure their correctness and authenticity and are sent for a detailed analysis using simple statistical techniques. 5.1 Research Design The study follows a descriptive research approach where data are collected using a survey among various classes of investors in the UK. Therefore, it is basically a survey research in which the researcher does not try to explore any new theories and models, but simply describe what the status of various investors is with regard to investment, risk and return. In a descriptive study, the characteristics about the phenomenon under study are detailed. As opposite to this, an explanatory research finds the reasons for the phenomenon described earlier. It tries to ascertain how frequently certain things happen and the association between the variables under study. Thus, descriptive research explains what is going on and explanatory study diagnose why it is happening (Vaus 2001). The study relies solely on primary data that are collected through mailed questionnaire. In other words, personal survey method is adopted to collect primary data from respondents. The questionnaire includes only closed questions to be answered by respondents themselves. The questions were drafted using the ordinal scaling technique, particularly Likert Scale. 5.2 Sample Design This study is basically a survey research. A survey research can be carried out in two ways. First, a complete enumeration survey wherein all the units in the population / universe are studied to arrive at the conclusion. The result of complete enumeration method is always reliable and the researcher need not worry about the accuracy of the result. But it is impossible in many cases as it is time consuming, expensive, and non-operational. Sample survey is the alternative method wherein a selected number of units from the population are taken for a detailed study and the conclusions derived there from are generalized for the entire population. This is a superior method in terms of cost, time. Accuracy can also be ensured as the sample units are the real representatives of the population from where such samples have been drawn. The sample units are most likely to exhibit the characteristics of population as they are taken from the population. 5.3 Sampling Procedure The sampling procedure applied is non-probabilistic sampling in which both judgmental and convenient sampling methods are used. The sample covers the people (investors) from different walks of life in (please select a city of your choice such as London). The respondents include professionals, self employed people, salaried people, service men, housewives, and students in an equal proportion. The data relating to inventors are collected from different government and non-government investment avenues. 5.4 Sample Size The total sample size is initially fixed to be 600 out of which 10% respondents were reluctant to respond and the final sample frame is fixed as 640. A pilot study is also conducted to ensure that appropriate methodology and questionnaire are used and the accuracy of research findings. 5.5 Data Sources The study relies solely on primary. Primary source include an experience survey carried out among the respondents that include professionals, self employed people, salaried people, service men, housewives, and students in an equal proportion. The data from persons are collected by means of a survey by serving questionnaire. Therefore, questionnaire is the tool of data collection. The questionnaire is prepared by incorporating closed questions, which are arranged logically. 5.6 Data Collection Instruments It includes the tools used to collect the data concerning the study from the respondents. The present study involves samples survey which provides primary data. All the questions are closed in nature so that respondents will not be reluctant to reply as warranted by the study. 5.7 Data Editing and Coding The data collected from primary source always need editing. Editing is the process of eliminating the errors and mistakes from the raw data so as to make them ready for further analysis. Editing is done for eliminating mistakes, completing an incomplete data, omitting errors etc. The quantitative and non-quantitative data which have been edited have been converted in to another form called codes for easy and convenient analysis. Codes are used to convert data which are lengthy and cumbersome for analysis. Coding is made in the SPSS Program. 5.8 Data Variables and Analysis The independent variables of the study included gender, age, income, education, occupation and personality. The dependent variables were the various investment avenues/vehicles. The various investment avenues considered were-equity shares/derivatives, mutual funds, insurance, post office deposits, bank fixed deposits, bullions, commodities, real estate, bonds/debentures, National Saving Certificates (NSC) and Public Provident Fund (PPF). The hypotheses were tested at 5% level of significance. Investor personality refers to the investment risk profile of the investor. Five personality types were considered-conservative, medium conservative, moderate, medium aggressive and aggressive-from most risk-averse to least risk-averse. Investor personality was determined by totaling the points allocated to each selected option for each of the four questions in the questionnaire framed to judge the personality. Statistical Package for Social Sciences (SPSS) was used for data analysis. For testing H1, Mann-Whitney U Test was employed. For testing H2 to H3, Kruskal-Wallis Test was used. Further, to test the effect of various combinations of demographic and personality variables on the investment choice (since the variables are interdependent), Multivariate Analysis of Variance (MANOVA) was applied. 6.0 Limitations of the Study The first and foremost problem to be confronted by a researcher taking survey approach, particularly sample surveys, is that no survey research is free from personal prejudice and bias. First, the researcher who is prescribing the methodology may be unduly influenced by certain factors intentionally or unintentionally because of the nature of the study. Similarly, the respondents while replying to the questions may be prejudiced by their opinion because of their misconception about or affection to a particular area. All these prejudices and personal bias will lead to sampling errors which in turn will affect the quality of work adversely. The sampling errors may arise at different stages of research, right from prescribing an inappropriate methodology and may continue along sampling procedure, questionnaire preparation, data collection and analysis. However, maximum effort can be made by the researcher to minimize the sampling errors by properly selecting the sample method and sample units. The project is based on the data collected from some specific groups of participants. This study could be extended to other groups also. Also its scope is limited to (please select your city), which forms only a negligible part of UK which is very diverse in itself; the results may not be valid elsewhere. A research is a special study that defines and covers particular area/concepts for its own sake to help its smooth flow. A research with a lot of variables may find it difficult to confine the meaning of those variable and its related concepts. In this study, the investment behaviour of people from various walks of life is studied with reference to personality types and demographic features. Basically, human behaviour is a complex phenomenon and investment behaviour cannot be fully separated from the former. An investment behaviour exhibited by someone at a point of time need not be the same at another time point about the same investment vehicle. This makes it clear that no systematic and empirical study can accurately study the relationship between psychological factors and investment selection. Also, it is not possible to fix the personality types as it goes on changing in line with the changes in demography. As regards the investment avenues are concerned there are plenty of investment avenues, government sponsored and privately sponsored. This creates another problem as to how many investment avenues are to be considered. However, the research would help the investment professionals and investors who pay much attention to scientific methods of investment decisions and selection. Moreover, the research will give opportunities that pave the way for research gap which can be utilized by other researchers and academicians. The most important contribution of any research is the addition to the existing theories and studies. 7.0 Conclusion Behavioral finance is a nascent but growing are of interest to investors as well investment professionals. The main contention of this burgeoning are of study is that man makes investment decisions using insights not only from standard finance but certain irrational theories as well. The present study is an attempt to measure the influence of demographic profile and personality of investors on investment selection. The results of this study could help the Wealth Managers in the Wealth Management process and in building a successful Wealth Management relationship. The analysis of how an investment choice gets affected by the demographic variables and personality profile could help the financial advisors to give better suggestions to their clients. The investment preferences are dynamic due to the changes in social, economic and political atmosphere, as well as introduction of new investment avenues. It is recommended that more similar studies should be undertaken with diverse samples at different locations and from time to time in order to stay abreast with the latest preferences of the investors, and accordingly advise them. References Hershey, John C., and Schoemaker P, 1980, "Risk Taking and Problem Context in the Domain of Losses: An Expected Utility Analysis", Journal of Risk and Insurance, Vol. 47, No. 1, pp. 111-132. Hudgens Gerald A and Linda Torsani Fatkin, 1985, "Sex Differences in Risk Taking: Repeated Sessions on a Computer-Simulated Task", The Journal of Psychology, Vol. 119, No. 3, pp. 197-206. Harlow W V and Keith Brown, 1990, "Understanding and Assessing Financial Risk Tolerance: A Biological Perspective", Financial Analysts Journal, Vol. 46, pp. 50-62. Jianakoplos N and Bernasek A, 1998, "Are Women More Risk Averse", Economic Enquiry, Vol. 36, No. 4, pp. 620-630. Byrnes J, Miller D and Schafer W, 1999, "Gender Differences in Risk Taking: A Meta-analysis", Psychological Bulletin, Vol. 125, No. 3, pp. 367-83. Schooley Diane K and Debra Drecnik Worden, 2003, "Generation X: Understanding Their Risk Tolerance and Investment Behavior", Journal of Financial Planning, The Financial Planning Association, September 2003-Article 8. Filbeck G, Hafield P and Horvath P, 2005, "Risk Aversion and Personality Type", Journal of Behavioral Finance, Vol. 6, No. 4, pp. 170-180. Vaus De D.A., 2001, Research Design in Social Research, Edition: illustrated, reprint, 279 pages Kothari C. R., 2005, Research Methodology: Methods & Techniques, 2, New Age International Read More