Factors Influencing Investors Decisions in Real and Financial Assets

IRJMSH Vol 13 Issue 11 [Year 2022] ISSN 2277 – 9809 (0nline) 2348–9359 (Print) Factors Influencing Investors Decisions in Real and Financial Assets Shailendra Choudhary Assistant Professor, Email Id – schoudhary19@outlook.com Dr. Maneesh K. Arya Reader, IMS DAVV ABSTRACT Investor behavior influences financial environment of a country. Risk and Return expectationof investors depend upon various factors. This study tries to establish between different factors i.e. Liquidity, return on investment, and risk. Structured questionnaire was administered on100 investors. The present study was done to explore the factors which influences the investor’s decisions in Real and Financial Assets. Keywords: Individual Investors, Liquidity, Return on Investment INTRODUCTION The growth of an economy depends on savings and investment patterns of the individuals.Investment decision making of individuals is affected by a number of internal and externalfactors. The investment behavior includes risk taking capacity, return expectation andinvestment objectives. Investors decision is affected to a great extent by factors i.e. Return on Investment, Liquidity and Risk in Investment. All these factors have been widely researched but liquidity, Return on investment are the factors and their impact on investment behavior in Indian perspective is less researched dimension to decision making. The dictionary definition of risk is the chance that an investment's actual return will be different than expected. While some investors are inclined to take more risk than others, thereis always a place for low risk investments as part of a properly-balanced portfolio. Determining what risk level is most appropriate for an investor isn't an easy question toanswer. We assume that people who want to earn more return wiiling to expose under higher degree of risk. In this study it is our endeavor to study the relationship between the risk taking and investor’s behavior of individual. An investor’s decision will depend on his/her goals, income and personal situation, among other factors.The rest of the paper is organized as follows: review of literature, research methodology, results and discussion and conclusion. REVIEW OF LITERATURE Drawing from the field of economics; Finance focuses on efficiency. From a societalperspective, a key function of finance is to ensure allocational efficiency – the efficientallocation of scarce resources to their most productive use. Emotional and psychologicalfactors often override the International Research Journal of Management Sociology & Humanity ( IRJMSH ) www.irjmsh.com Page 38 IRJMSH Vol 13 Issue 11 [Year 2022] ISSN 2277 – 9809 (0nline) 2348–9359 (Print) rational expectations theory in financial decision making, affectingtrading performance (Lo et al., 2005), and only if risk aversion is pegged at unrealisticallyhigh levels, does the efficient market hypothesis and rational expectations theory explain the volatility of the market overall (Shiller, 2003). ‘‘Risk aversion’’ is a preference for less riskover more. The Penguin Reference Dictionary of Psychology (Reber and Reber, 2001, p.634) however defines ‘‘risk’’ as ‘‘An action that jeopardises something of value . . . .’’Most people are risk averse (Kahneman and Tversky, 1979). Wealthier investors are more willingto incur more risk than less wealthy ones. Optimal asset allocation in an investment portfoliomust consider the tradeoff between expected return and risk (Yook and Everett, 2003). Investors’ risk preferences may affect this optimization (Hallahan et al., 2004). Risktakingpropensity is a multidimensional construct. Investment risk tolerance has four components: propensity, attitude, capacity, and knowledge. People with high sensation seeking tendenciesshowed greater risk-taking tendencies in financial decisions (Wong and Carducci, 1991). Lovric et al. (2008, p. 1) stated that the: [. . .] investment process is influenced by a numberof interdependent variables and driven by dual mental systems, the interplay of whichcontributes to bounded rational behavior where investors use various heuristics and may exhibit behavioural biases. There are also other factors that skew decisions, suchasmisevaluations of financial assets (Ritter, 2003), lack of understanding and miscalculation of basic financial measures, such as volatility (Goldstein and Taleb, 2007), and finally, the effect of word of mouth and media driven feedback (Shiller, 2003).Simon (1956, 1959) proposed that decision makers are bounded rational and they aim at satisficing behaviour and not maximizing one. Neuroscience research has shown that “financial decision making has important roots in emotional and motivational processes and cannot be understood fully as the expression of cognitive limitations” (Sjobreg and Engelberg, 2006, p. 21). This is on account of the fact that investment decision making is a lot more than just mental processes that guide them. The argument for this awareness is based on the premise that people are very emotional when it comes to money matters and financial decision making under conditions of risk and/or uncertainty, and therefore ignoring this aspect would lead to an incomplete understanding of human behaviour (Zajonc, 1979; Lo and Repin, 2002; Lucey and Dowling, 2005).Assessment of risk is rooted in neurological processes (Peterson, 2007a). According to Tseng(2006, p. 10), “People’s cognitive evaluations of risks tend to differ from their emotional reactions to those risks”. One of the fundamental assumptions of Markowitz’s (1952), meanvariance (MV) theory is that risk is undesirable and therefore people are risk averse and that for a given level of risk people want the maximum returns and for a given return, people want to minimize risks. Thaler (1985) develops a concept of mental accounting in which decision makers apportion their wealth, knowledge and other resources into discrete and non-fungible mental accounts. In economic terms, this leads consumers to over-weight sunk costs and current cash outlays. It also leads to a number of behavioural anomalies. Thus, decisions involving risk are determined by expectations of how alternative outcomes will impact International Research Journal of Management Sociology & Humanity ( IRJMSH ) www.irjmsh.com Page 39 IRJMSH Vol 13 Issue 11 [Year 2022] ISSN 2277 – 9809 (0nline) 2348–9359 (Print) endowment, rather than on probabilities of the outcomes. This explains why a number of studies (e.g., Forlani, 2002) find that the facts of a decision are frequently ignored. And more qualitative – group of decision stimuli is the decision maker’s paradigm which comprises a pattern of personal features that are relatively stable across different decision types. These include competencies, personal attributes (especially demography and personality), endowment, experience in previous decision making, and future aspirations. Hilary and Hui (2008) found that both individuals and organizations exhibiting a high degree of religiosity display lower levels of risk exposure in decision making. Similarly, Fernando and Jackson (2006) noted that in the individuals studied, outcomes of difficult decisions, and both good and bad, were in some way attributable to a religious, spiritual or value characteristic. Addressing the role of emotional intelligence in decision-making processes, Sevdalis et al. (2007) noted that although empirical research has emphasized the relevance of emotions in decisionmaking processes, individual differences in the perception and experience of emotion have been largely overlooked. The authors concluded when people make decisions, they often think about the emotions the outcomes are likely to trigger. Further, Sevdalis et al. (2007) outlined decision-makers:1. Anticipate their emotions before a decision materializes;. 2. Experience them when they receive the outcomes of their decision; Recall them from memory when they contemplate past decisions (good or poor). There has been a debate on whether financial scandals are caused due to excessive profit seeking. One of the real root causes of the corporate scandals is “the overemphasis corporations have been forced to give in recent years to maximizing shareholder value without regard for the effect of their actions on other stakeholders” (Kochan, 2002, p. 139). Many corporations have profit-sharing programs that are intended to align management interests with owners’ value maximization goals. Profit-based mechanisms create a huge amount of pressure and opportunity for individual managers and may have some serious flaws. Bazerman and Watkins (2004) have found that financial scandals are actually surprises, which firms can predict well in advance. Owing topsychological,organizational and political factors, firms fail to predict them. By proper recognizing, prioritising and mobilizing firms can reduce their vulnerability to such scandals. OBJECTIVE OF THE STUDY  To explore the factors influencing investors decisions in real and financial assets. RESEARCH METHODOLOGY The Study – The Study is exploratory in nature. The Sample – Non probability judgemental sampling technique has been used. For the research, 100 questionnaires were distributed to the target respondents that covered customers in Indore through email and collected the responses online. Due to time and money constraints, it is not International Research Journal of Management Sociology & Humanity ( IRJMSH ) www.irjmsh.com Page 40 IRJMSH Vol 13 Issue 11 [Year 2022] ISSN 2277 – 9809 (0nline) 2348–9359 (Print) convenient for the researcher to take a larger sample size. Research has introduced relation between investors and investors decisions The Tools for Data Collection –Exploratory Factor Analysis has been used to explore the factors. Tools for Data Analysis - The data coded in excel using MS-Office package. The coded data was then analyzed using SPSS version 20.0. RESULTS AND DISCUSSIONS The results and discussion are as follows – This table shows the value of KMO and Bartlett’s Test which is .886 and shows that the researcher is eligible to do factor analysis. Table – 1 KMO and Bartlett's Test Kaiser-Meyer-Olkin Measure of Sampling Adequacy. Bartlett's Test of Sphericity .886 Approx. Chi-Square 790.921 df 153 Sig. .000 After doing factor analysis three factors were explored which are as follows – Table – 2 – Details of Return on Investment Factor Return on Investment Items Q16. Do Inflation in the country affect your investment decisions. Q17Do Interest Rate in the country affect your investment decisions. Q15Do GDP of the country affect your investment decisions. Q18Do your invest in the Assets that require big amount. Q11Government Regulations affect your investment decisions. Q9Attractiveness of an industry or market affect your investment decisions. Q1Is Size of Business affects your investment decisions. Q8Do you prefer to look at financial statement conditions before making any investment decisions. Q12Do you prefer Assets that can convert easily into cash. Item Load .807 .782 .759 .663 .657 .639 .558 .545 .443 Table -3 – Details of Liquidity Factor Items Q6 Interest rates affects investment decisions. Q13 Do you prefer assets having life more than 5 years. Q7 Political Condition of a country affect investment decision. Item Load .774 .708 .682 International Research Journal of Management Sociology & Humanity ( IRJMSH ) www.irjmsh.com Page 41 IRJMSH Vol 13 Issue 11 [Year 2022] ISSN 2277 – 9809 (0nline) 2348–9359 (Print) LIQUIDITY Q10 Do you prefer to invest in different Sectors/ Industries. Q3 Is Announcement of dividends affect your investment decisions. Q2 Is past return of the company affect your investment decisions. Q5 Do Investors sentiment affect your investment decisions. Table -4 – Details of Risk in Investment Factor Items Q4 Do you prefer Volatile Stock for investment. Risk in Investment Q14 On the following scale please indicate your tolerance for risk. .614 .594 .512 .511 Item Load .787 .634 CONCLUSION The above discussion concludes that investment decision making is affected by numerous factors. The results reveal that Indian investors majority want to get low risk and higher returns. Their preferred investment alternatives are saving bank accounts, Fixed Deposits, Insurance Plans, Gold, Mutual Funds and Real Estate.This research study concludes that decision making process of investor is affected by many behavioral factors.These behavioral factors impact on decision making is vary to different degrees. The study makes some suggestions for equity fund managers or individual investors to make improvement in their investing activity by educating themselves about behavioral factors that make influence on their decision making and cause to their irrational behavior. This could help investors in diminishing the uncertainty in their decision making of investment and may help them in uplifting their confidence. This may cause to raise their profits and market efficiency. 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