Factors Affecting Investment Decision Making of Urban Individual Investors in India

Abstract

For the sake of financial security individuals must save and invest. Due to the changes in the socio-economic environment, not only have individuals become increasingly responsible for their well-being but the landscape of financial markets has changed radically. These changes have been characterized by an increase in the complexity of financial products. Investment decision making (IDM) in such an environment has become extremely difficult. Although modern portfolio theory assumes that investors are rational, in reality it is not so. The literature review provides ample evidence to show that individuals are not rational and markets are not efficient. Further, it provides the theoretical framework to identify the various factors that influence IDM among urban individuals. Although the financial innovations are important and relevant, they ignore the essence of the financial products; of whether it is suitable to those whom it is designed and marketed. For this reason, it is important to understand individuals from a holistic point of view rather than from a single viewpoint. The purpose of the study is to describe the factors that influence IDM of urban individuals in the current scenario. The factors that affect the IDM considered in this study are (a) demographics (b) personality (c) social environment (d) experience (e) choice criteria (f) contextual factors and (g) biases based on information processing errors. The data is substantiated by an in-depth interview of intermediaries who facilitate IDM among individual investors. Data was collected primarily through a survey in the form of a self-administered questionnaire from 1146 urban individual investors as well as from interviewing 40 financial intermediaries. The secondary sources of information were gathered from books, journals, newspapers, working papers, study reports and websites. The validity of the instrument was obtained with the help of experts and pilot tested for a small group of respondents and the reliability was tested using Cronbach’s alpha. The populationconsidered for the study was urban middle class individuals with a minimum disposable income of Rs. two lakhs per annum. Since the data collected is very personal and highly confidential, snowball sampling is used for the purpose of the study. Data is analyzed using Kruskal Wallis test, Pearson’s correlation, Principal Component Analysis and Regression Analysis using SPSS version 17. The results of the study indicate that demographics, personality traits, and experience influence the IDM of individuals. The intermediaries’ opinion agrees with the results of demographic factors and experience. Among the social environment factors, family and non-commercial sources are found to influence the IDM of individuals. As per the intermediaries’ opinion, non-commercial sources and informal sources influence individuals to a larger extent. Among the choice criteria factors, convenience and risk factors influence the IDM of individuals. But, as per the intermediaries’ opinion, return affects IDM to a large extent. Among the contextual factors, task complexity and information processing affects the IDM of individuals. As per the intermediaries’ opinion, task complexity and time constraint affect individual investors. Among the biases, representativeness, framing, availability and loss aversion affect the IDM of individuals. The regression results show that the biases of representativeness, framing, anchoring and loss aversion could be explained using the explanatory variables of personality, social environment, choice criteria and contextual factors. The intermediaries further mention that individuals are affected by emotion while investing. An individual would be able to make better investment decisions by being aware of his/her own biases. By understanding the individual investor, the financial intermediaries could customize financial plans and products to suit the needs of their clients. The policy makers could design policies so as to encourage a positive investment environment that is in favor of individual investors.