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Robert A. Nagy and Robert W. Obenberger

Individual investor behavior is influenced by both economic and behavioral factors. A study examined seven key factors that influence stock purchase decisions: wealth maximization, returns, risk, financial stability of firms, diversification, social motivations, and emotions. The study found that individual investors base decisions on both classical economic criteria as well as diverse behavioral variables, rather than relying on a single approach.

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Navya Tandon
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85 views1 page

Robert A. Nagy and Robert W. Obenberger

Individual investor behavior is influenced by both economic and behavioral factors. A study examined seven key factors that influence stock purchase decisions: wealth maximization, returns, risk, financial stability of firms, diversification, social motivations, and emotions. The study found that individual investors base decisions on both classical economic criteria as well as diverse behavioral variables, rather than relying on a single approach.

Uploaded by

Navya Tandon
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Factors Influencing Individual Investor

Behavior
Robert A. Nagy and Robert W. Obenberger

Previous studies of retail investor behavior have examined motivation from economic
perspectives or studied relationships between i¢ and behavioral and demograph
variables. Examination of the various utility-maximization and behavioral variables under-
lying individual investor behavior provides a more comprehensive understanding of the
investment decision process.
These variables can be grouped into seven summary factors that capture major investor
considerations. Data collected from a questionnaire sent to a random sample of individual
equity investors with substantial holdings in Fortune 500 firms reveal that individuals base
their stock purchase decisions on classical wealth-maximization criteria combined with diverse
other variables. They do not tend to rely on a single integrated approach.

conomic utility theory views the individual's (3) make investment decisions free of assumptions
investment decision as a tradeoff between im- about utility functions or probabilities (stochastic
mediate « and deferred
The individual investor weighs the benefits of
consuming today against the benefits that may be BACKGROUND
gained by investing unconsumed funds in order to The literature on utility theory does not typically
enjoy greater consumption at some point in the address individual investor decision processes.
future. If the individual chooses to defer consump- Rather, it focuses on the development and refine-
tion, he will, according to theory, select the port- ment of “macro” models that explain aggregate
folio that maximizes long-term satisfaction. market behavior. However, some empirical stud-
The axioms of utility theory, developed by ies of individual investor behavior have examined
Von Neumann and Morgenstem, argue that inves- utility theory constructs focusing on individual
tors are (1) completely rational, (2) able to deal rather than aggregate investor profiles. Baker and
with complex choices, (3) risk-averse and (4) Haslem, for example, find that dividends, ex-
wealth-maximizing.' Utility theory further as- pected returns and the firm’s financial stability are
sumes that investors maximize expected utility— critical considerations for individual investors.*
measured in terms of anticipated returns and vari- Baker, Hargrove and Haslem find that investors.
ances from these expectations (the mean/variance behave rationally, taking into account the invest-
approach).” That is, each investor selects the port- ment’s risk/return tradeaff.*
folio that maximizes expected return while mini- A relatively new financial subdiseipline, be
mizing risk. havioral finance, has achieved impressive strides
Other theories of investor p e have in explaining the bet | aspects
of i
made less stringent assumptions about how inves- decisions. Behavioral finance investigates choice
tors make choices. Competing theories have ar- under uncertainty. Three major elements frame
gued that i: (1) seek i that max- ioral finance—Prospect Theory, regret aver-
imize geometric mean retumn, (2) concentrate on sion and self-control.> Each element captures be-
avoiding “bad” outcomes (safety-first models) or havioral attributes of individual investors.
Empirical studies of the behavior of individual
Robert A. Nagy is Associate Professor of Finance at the University
of investors first appeared in the 1970s, The Wharton
Wisconsin-Green Bay. Robert W. Obenberger is Associate Professor of Survey, one of the more comprehensive studies of
Marketing at the University of Wisconsin-Green Bay, investor behavior, examines how demographic

Financial Analysts Journal / July-August


1994

The CFA institute


ts collaborating with JSTOR to digitize, preserve, and extend access 10
Financial Analpsts Journal
wi

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