Establishing a link between risk tolerance, investor personality and behavioural finance in South Africa

Abstract

The main objective of this paper was to establish which behavioural finance biases are associated with a certain level of risk tolerance and investor personality. Furthermore, the study aimed to indicate how these behavioural finance biases can influence investment decisions. Since behavioural finance is becoming more essential in the investment industry, further research within a South African context was regarded as necessary. Results indicated that investors with a low-risk tolerance level and a conservative investor personality are subject towards loss aversion and mental accounting biases. Investors with a high-risk tolerance level are mostly subject towards the self-control bias. The significance of this study will enable investment companies to more accurately profile their investors and to offer more refined investment options.

Keywords:

• behavioural finance
• investors
• investor personalities
• risk tolerance
• investment decisions

JEL classification:

• D81
• G11
• G2

Public Interest Statement

Investors generally make financial decisions based on their personality and how much financial risk they are willing to tolerate. These same investors often deviate from their original investment decisions due to certain financial biases that drive these decisions. Up till now investment companies have only incorporated risk tolerance and investors personalities but have excluded behavioural finance biases due to a lack of quantifiable research. Understanding how different investor personalities make financial decisions and what bias drives these decisions will benefit both the investment company and the individual investor by minimising the risk and leaving more opportunity for higher returns.

Conflict of interest statement

The authors have no relationship, financial or otherwise, with individuals or organisations that could influence the author’s work inappropriately and as such represents no conflict of interest.

Cover image

Source: Author.

Additional information

Funding

The authors received no direct funding for this research.

Notes on contributors

Zandri Dickason

Dr Zandri Dickason-Koekemoer and Ms Sune Ferreira

The researchers specialise in financial risk management having obtained their PhD and Master degrees in this field. Their main focus area is the financial risk tolerance of investors and studying these investors financial behaviour. These researchers have already published a few articles in accredited journals regarding this field of interest.