Modelling investor behaviour in the South African context

PhD (Economic and Management Sciences), North-West University, Vaal Triangle Campus, 2018Modelling investor behaviour in the South African context is important for investment companies to profile their clients. Investor profiles include elements of risk tolerance and investor personalities; however, from this study it is important to include elements of behavioural finance as well. Historically, it was believed that investors make rational investment decisions, but as concluded from this study, it is evident that investors make irrational investment decisions. Irrational behaviour of investors includes behavioural finance biases such as representativeness bias, overconfidence bias, anchoring bias, gambler’s fallacy, availability bias, loss aversion, regret aversion, mental accounting bias and self-control bias. In order to profile investors accurately, behavioural finance elements should be added to existing measures of risk tolerance levels and investor personalities. From the theoretical and empirical objectives, an insight was provided in investor behaviour. The theoretical objectives illustrated an in-depth analysis of risk tolerance; different investor personalities were described; origin of behavioural finance was discussed and a theoretical framework was contextualised. From the theoretical objectives it can be concluded that socioeconomic factors influence the risk tolerance level investors are willing to take. Moreover, behavioural finance biases are influencing investor behaviour. The primary objective of this study was to construct an investor behaviour profiling model by linking each behavioural finance bias to a specific level of risk tolerance. The research design consisted of a literature review and an empirical study by applying a quantitative approach and positivistic paradigm. The target population was investors in South Africa and the sampling method that was applied, was a convenience sampling method to obtain an unbiased sample. The research instrument was a self-administered questionnaire that was distributed to over 200 000 participants of an investment company. Demographic questions were asked related to province of origin, mother-tongue language, gender, ethnic group, and age. The questionnaire also consisted of the following scales: survey of consumer finances (SCF); behavioural finance; satisfaction with life scale (SWL); domain-specific risk-taking scale (DOSPERT) and Grable and Lytton risk tolerance scale (GL-RTS). The results from the study indicated that if an investor has a low to medium risk tolerance level, this investor might be subject towards the representativeness bias, anchoring bias, loss aversion, overconfidence bias, gambler’s fallacy, availability bias, regret aversion, self-control bias or mental accounting bias. As a result, behavioural finance biases can potentially influence the investment choices of an investor and ultimately the risk tolerance level of investors. The findings were utilised to develop a model to determine which behavioural finance biases are subject towards a specific level of risk tolerance. As a result, these findings will make a significant contribution towards the way financial investment companies profile their clients. By implementing this investor profile model, investment companies are given the opportunity to profile their clients more accurately according to the type of bias they are influenced by and the level of risk this type of investor will be willing to tolerate. A more accurate investor profile will lead to the achievement of the investor’s desired financial position. Future research can contribute to determine whether the type of assets investors invest in influences irrational investor behaviour and decisions. If investors invest in specific assets in an asset portfolio, those investments might have an influence on behavioural financeDoctora