What makes risk-averse investors tick? A practitioners guide

Figures & data

Figure 1. Endogenous and exogenous factors influencing investor risk tolerance behaviour.

Table 1. Behavioural finance biases

Behavioural finance bias	Description
Representativeness	Investors classify new information and make investment decisions based on their perceptions of past experiences or known events.
Overconfidence	Investors have a tendency to overestimate their investment capabilities.
Anchoring	Investors have a tendency to rely on a single piece of information when making investment decisions, regardless of the fathomless information available.
Gambler’s fallacy	Investors inaccurately predict financial market movements as they base their investment decisions on future market trends.
Availability bias	Individual investors base their investment decisions on the most recently available information.
Loss aversion	Investors have a greater inclination to avoid losses rather than to achieve gains and therefore, have a tendency to hold onto non-performing investments with the anticipation that investments will produce positive returns in the future.
Regret aversion	Investors tend to manage situations to avoid feelings of regret or embarrassment of reporting a loss as a result of poor investment decisions.
Mental accounting	Investors group information regarding particular events and keep track of gains and losses concerning investment decisions in separate mental compartments.
Self-control	Investors exercise self-control to lessen the temptations of taking bigger financial risks to avoid large financial losses and to protect their investments.

Source: Kannadhasan (2006), Byrne and Brooks (2008), Mazzoli and Marinelli (2011), Singh (2012), Pompian (2016), Dickason (2017) and Ferreira (2018).

Table 2. Macroeconomic factors

Macroeconomic factor	Description
Interest rates	Interest rates are referred to as the compensation rate agreed upon between lenders and borrowers of money (Marx et al., 2009). Interest rates have a significant influence on the entire economy, as well as on investments, such as interest-bearing investments and shares. Investments are financed either by means of current savings or by borrowing (Patel, 2019).
Exchange rates	An exchange rate is the rate at which one domestic currency is converted into a foreign currency (Ryan, 1988; Van der Merwe & Mollentze, 2010). Volatility in the exchange rate influences trade and investment decisions and constrains a country’s economic growth. It is important to have a comprehension of what factors contribute to exchange rate volatility to assess whether economic policy can reduce volatility (Mavee & Schimmel-pfenning, 2017).
Inflation	Inflation is referred to as the sustained increase in the general level of prices (Ryan, 1988; Fourie & Burger, 2009). Inflation can influence investments over the long term. Pettinger (2021) affirmed that high and volatile inflation is likely to generate more uncertainty regarding the cost of investments and investors may fear that high inflation levels could bring about economic uncertainty and future economic downturns. Countries with long-lasting periods of low and stable inflation frequently experienced higher rates of returns on investments. Coronation Fund Managers (2019) stated that investors should be attentive to inflation over the long term as it can erode investment returns. This is as a result of the investment portfolio returns being less than the inflation rate, and consequently, investors’ abilities to acquire goods and services in the future may decline.
GDP	GDP is described as the total market value of final goods and services produced domestically in a country during a particular time period, excluding invisibles, such as income and dividends, earned out of the country. Thus, GDP reflects the overall performance of a country’s economy (Ryan, 1988; Marx et al., 2009). A healthy growth rate in the GDP of a country, indicating good economic performance, brings about an increase or positive effect on a country’s stock market. As a result, investors have a more positive economic outlook and are more likely to invest in riskier assets or the stock market. When a country has a less desirable GDP, indicating poor economic performance, the opposite is true (Money Matters, 2022).

Figure 2. Conceptual model of investor risk tolerance behaviour, endogenous factors and exogenous factors.

Table 3. Standardised regression weight results for the specified structural model

Constructs			Estimate	P-value
Low risk	Demographical factors
	←	Age	0.110	0.013**
	←	Gender	−0.007	0.875
	←	Education	−0.026	0.548
	←	Annual income	−0.048	0.317
	←	Net worth	−0.134	0.003**
	←	Household size	0.043	0.327
	←	Number of financial dependants	−0.030	0.485
	Socio-cultural factors
	←	Financial and investment knowledge	−0.165	***
	Investor life cycle
	←	Growth investor phase	0.138	0.016**
	←	Defensive (cautious) investor phase	−0.007	0.904
	Behavioural finance biases
	←	Representativeness	0.185	***
	←	Overconfidence	0.117	0.008**
	←	Anchoring	0.304	***
	←	Gambler’s fallacy	0.027	0.540
	←	Availability bias	0.127	0.004**
	←	Loss aversion	−0.243	***
	←	Regret aversion	0.033	0.448
	←	Mental accounting	0.146	0.001**
	←	Self-control	0.017	0.692
	Factors of the external environment
	←	Political-legal factors	−0.101	0.307
	←	Technological factors	0.010	0.878
	←	Tax implications	−0.027	0.667
	←	Interest rates	0.107	0.105
	←	Exchange rate volatility	−0.001	0.992
	←	Inflation	−0.206	0.003**
	←	GDP	0.309	0.033**
	←	International events	−0.468	***
	←	Market fluctuations and volatility	0.470	***

***Significant at the 0.001 level.

** Significant at the 0.05 level.

* Significant at the 0.1 level.

Figure 3. Proposed model to profile the risk tolerance behaviour of risk averse investors based on endogenous and exogenous factors.

Table 4. Proposed weights to profile the risk tolerance behaviour of risk-averse investors

		Low-risk tolerance behaviour
Endogenous factors	Demographical factors
	Age	0.110
	Net worth	−0.134
	Socio-cultural factors
	Financial and investment knowledge	−0.165
	Investor life cycle
	Growth investor phase	0.138
	Behavioural finance biases
	Representativeness	0.185
	Overconfidence	0.117
	Anchoring	0.304
	Availability bias	0.127
	Loss aversion	−0.243
	Mental accounting	0.146
Exogenous factors	Factors of the external environment
	Inflation	−0.206
	GDP	0.309
	International events	−0.468
	Market fluctuations and volatility	0.470

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