Emerald | Qualitative Research in Financial Markets

Individual Investor Biases: A Segmentation Analysis

Shalini Kalra Sahi, Ashok Pratap Arora — 2012-04-06 00:00:00.0

Abstract

Purpose - Indian Investors have been exposed to a plethora of investment opportunities in the past decade and a half, after the liberalization process, which commenced in 1991. Over the years, the increased competition has brought a wind of change, not just in the economic environment within the country, but also a radical change in the choices and preferences of the financial consumers. In the endeavor to provide more personalized advice to the financial consumers, financial service providers need more insights into the minds of the consumers. However, little work has been done to understand the Indian individual investor.Design/methodology/approach - Exploratory research, using In-depth interviews, was undertaken to explore the manifestations of the biases among the Individual Investors. The initial inventory of 97 items pertaining to biases was assessed for content and face validity and subject to pilot test and subsequent rounds of modification. The final data was collected on a sample of 377 respondents, using a questionnaire that captured the following 8 biases: Reliance on Experts, Overconfidence Bias, Self-control Bias, Categorisation Tendency, Budgeting Tendency, Adaptive Tendency, Socially Responsible Investing Bias & Spouse effect. The segments of Investor biases were identified using cluster analysis. Findings - A cluster analysis of data, collected from individual investors was conducted, in India (N = 377), which yielded four main segments of individual investors biases, which have been termed as The Novice Learner, The Competent Confirmer, The Cautious Anticipator and The Efficient Planner. This typology has predictive validity with regard to financial satisfaction and perceived financial market knowledge.Practical implications - This is a very important practical tool which can help financial service providers define their target audience more sharply and understand how people in these segments differ, behaviorally. Better understanding of investor’s perceptions would help in designing more attractive financial products and development of marketing strategies that would impact the customer's financial satisfaction levels and create trust and customer loyalty. Originality/value - This paper is a first of its kind to empirically identify the segments of biased behavior among investors. This study contributes to furthering the understanding on investor behavior.

The Influence of Affect on stock price volatility: new theory and evidence

robert olsen — 2012-04-06 00:00:00.0

Abstract

Purpose - The purpose of this research was to see if an inverse relationship between expected return and perceived risk might be a source of excess price volatilityDesign/methodology/approach - After identifying that in other risky environments decision makers believed that risk and return varied inversely, we constructed a survey to ask 000 sophisticated investors about this relationship for investments. We also obtained a large Data set to measure the influence of recent stock returns on affect as measured by investor confidence.Findings - We found that a very large percentage of investors felt that return and risk varied inversely, not directly as current theory assumes. We also found that changes in past stock returns had an amplified effect on future expectations as would be the case if there was an inverse relationship between expected return and perceived risk.Research limitations/implications - The short research form and the lack of an experimental laboratory cross check. However the data from other risky environments is very large and convincing and so we kept the sample size to 2,000 and only tested members of the American Institute of Individual Investors and Certifed Financial Planners.Practical implications - The practical limitation is that Affect will be more inportant when the investment decision is more complex and time is a limiting factor. We identified situations where the Affective influence may be greater but did not conduct any additional statistical investigation.Originality/value - As an investment oriented paper it is unique. I research in the Behavioral Finance field and have never seen any investment work of this type.Affect is often discusssed no others have investigated the inverse return/risk hypothesis.

Assessment of Cross-border Implications of Economic and Financial Information for Central European Emerging Stock Market of Poland in Times of the Current Financial Crisis.

Lukasz Prorokowski — 2012-04-06 00:00:00.0

Abstract

Purpose - The current paper aims to expand an empirical assessment of correlations of the stock exchange in Poland with other stock markets and foreign economies. In doing so, the paper builds on qualitative research investigating the impact of economic and financial information originating from foreign markets. The paper attempts to explore international spillover effects during the current financial crisis. Furthermore, investigating information-induced performance of the Polish stock market in times of the current financial crisis may deliver interesting or novel findings on investors’ behavior influenced by their increased uncertainty and worsened investment environment. The current paper is designed to test the dependency of the Warsaw Stock Exchange (WSE) on financial situations prevailing in advanced stock markets. To this point, insights into the efficiency of the Polish stock market could be delivered. On this occasion, analyzing whether Poland’s stock market reacted in similar fashion to the advanced markets, which produced certain economic and financial information, delivers useful findings for investors interested in an international portfolio diversification process with Polish equities. Design/methodology/approach - The study builds upon questionnaires and interviews with practitioners associated with the Polish stock market. The interviewees represent both the advanced and emerging European economies. At this point, analyzing the notions of a cross-section of experts from different geographical regions increases the value of the findings. The interviewees were asked to comment on a wide range of examples mirroring the reaction of the WSE to economic and financial information derived from foreign markets in times of the current financial crisis. With this end in view, an empirical model evaluating the cross-border implications for the Polish stock market was specified. The model encompassed a wide range of variables and events influencing the performance of the Polish stock market and investors’ uncertainty during the nascent financial crisis. Hereto, the semi-structured interviews complemented the quantitatively obtained findings and allowed for a gap between theory and practice to be bridged. The qualitative approach injected a dose of realism into the empirical model utilized in the paper and contributed to the value of general findings.Findings - The current paper reports initial responses of the WIG20 indexed equity prices to 41 economic and financial information sets, originating from systemically significant markets. The influence of these sets is ranked in accordance with their influential powers. The ranking indicates which information events are more likely to be prioritized by investors associated with the WSE and which news are ignored in times of the current financial crisis. Henceforth, the findings outline the crisis-induced changes in the uncertainty of equity investors and the implications for investment decision making processes. Furthermore, comparing the responses to economic and financial information sets among different stock markets and industries delivers insight into the profitability of the international portfolio diversification based on either the country or industry specific factors.Practical implications - The current paper aims to contribute to the recent widespread discussion regarding the effects of the current financial crisis on equity investments and performance of stock markets. In doing so, the paper contributes in a threefold way to the academic literature devoted to the investigation of cross-border spillovers and equity investments in emerging stock markets. First, the paper analyzes the responses of the WSE to information shocks propagated by foreign markets, hence developing implications for information providers and stock market regulators. Second, the paper investigates the skepticism in light of the current financial crisis, about equity investments in the Central European emerging stock market of Poland. To this point, the paper is related to the literature on behavioral finance. Third, a detailed assessment of reactions of the Polish stock market to differentiated examples of economic and financial information, set against the current financial crisis, delivers useful findings for practitioners associated with the WSE. It enables them to predict how the analyzed stock market would react to similar information in the future. In this case, implications of the current paper remain quite practical.Originality/value - The current paper presents a detailed investigation of the WSE performance during the late phase of the current financial crisis (2010). At this point, the paper reports novel, timely and interesting findings. Furthermore, the paper focuses on the Polish stock market, which is relatively under-researched by the existing body of literate. However, Poland’s stock market became a leading Central European bourse during the current financial crisis. It attracted throngs of international and domestic equity investors, and hence became a subject of analyses for this research paper. As such, reporting a number of useful and important implications for the practitioners associated with the WSE constitutes the core value of the paper.

The 2008 Auction Rate Securities Market Collapse and US Nonprofit Health Systems

Louis James Stewart, Pamela Smith — 2012-04-06 00:00:00.0

Abstract

Purpose - This paper examines the 2008 collapse of the U.S. tax – exempt auction rate debt market from the perspective of not for profit debt issuers. Design/methodology/approach - Our study relies on a multi case study methodolog that focuses on three US nonprofit health systems that issued $52 million, $140 million, and $208 million respectively of auction rate bonds.Findings - Beginning in February 2008 we found that routine failed interest reset auctions led to drastically increased interest costs, costly debt refunding, and swap collateral postings for these three US nonprofit health systems. We also found that the Municipal Securities Rulemaking Board (MSRB) has taken on a more active role in regulating municipal debt market transactions and disseminating market information as a result of the 2008 economic dislocations. Research limitations/implications - As a case study our paper's conclusions may not be generalizable. Practical implications - Public sector and nonprofit treasurers must learn to adequately anticipate their organization’s potential exposure to debt conversion and refunding costs if variable rate debt or derivative financial instruments are to be used in the future. Originality/value - While the existent literature of this event has focused on the impact of these events on investors, our paper focuses on the impact of the 2008 collapse of the tax exempt auction rate debt market on nonprofit ARS issuers.