The Effect of Demographic Factors on the Behavior of Investors during the Choice of Investment: Evidence from Twin Cities of Pakistan

Table of contents

1. Introduction

ehaviour of investors in derivative markets is influence by many personal and situational factors during the choice of investment. Different researches are conducted to determine the behaviour influencing factors and attempt to understand and explain the degree to which these factors influence the decision-making process.

Investment involves the utilization of funds at present with the hope of better return in future. Traditional financial theories presume that investors are rational. People rationally choose between alternatives, they act rationally while making their investment decisions (Von Neumann, and Morgenstern, 1944). Later on it is explored by many researchers that Individual investor sometime make irrational decisions about their investments (Barberis, and Thaler, 2003).Different factors affect the investors behaviour during personal financial management process. Among others factors investor behaviour is also affected by demographic characteristics. Different research papers are conducted to identify the effect of demographic factors on investment decision and shown contradictory results from country to country and area to area.

The aim of this paper is to investigate the extent to which demographic factors affect an investor's risk tolerance attitude during decision making with the context of Pakistan. This study is primary data based collected from various respondents through a questionnaire. The respondents who were interested in investment were interacted from twin cities of Pakistan i.e. Islamabad and Rawalpindi.

2. II.

3. Literature Review

Many studies are conducted to examine the effect of demographic factors on investor's level of risk tolerance during investment decision making. People having different gender, ages, income level, knowledge, marital status and occupation shows different attitudes towards decision making, some are risk seeker and some adverse risk. Brief literature about the effect of demographic factors on investor's behaviour with international evidence is given below. Male's investors are more confident in their investment decisions, they have more financial knowledge and wealth and ability to take risks (Bruce, 1995) (Barber and Odean 2001: 261).When males are investing in their assets due to large income they take greater risks (Parker, and Terry 2002).Some studies shown that there is no significant effect of gender on risk tolerance during financial decisions (Schubert et al. 1999: 384-385

4. d) Marital Status

Marital status is also an effective factor influencing the decision making of investor. Single individuals are more risk taker than married because married individuals have responsibilities for themselves and dependents (Roszkowski et al. 1993) (Lazzarone, 1996) Barber and Odean (2001: 285).Some studies failed to find significance association between marital status and financial risk tolerance (McInish, 1982).

5. e) Income Level

Income level of investor is also affects its behaviour toward investment. A person with greater wealth takes greater risk (Terry, and Parker, 2002). Persons with upper level of income and millionaires tend to take higher risk as than individual with lower level of income (MacCrimmon, and Wehrung, 1986). Researcher explored that level of risk tolerance increase with the increasing level of income (Blume et al.1994)Investors invest their funds in more volatile portfolio composed of more volatile stocks when they have higher level of income (Barber, and Odean , 2001).

Higher level of income creates the ability of bearing the losses, so wealthier people preferred higher level of risk (bernheim et al, 2001).

In contrast some researchers shown income level has no relationship with financial risk tolerance (Strydom et al (2009: 18) f) Occupation Occupation means the activity in which people engaged for pay. Those people who generate their income directly from their own business, trade, or profession leads to higher levels of risk taking as compare to the people of straight salary work for others (MacCrimmon & Wehrung, 1985).Occupational status is also affecting the level of risk taking ability; people with higher ranking occupational status are more risk seeker as compare to low ranking occupational status (Roszkowski et al., 1993).People having low risk taking ability choose low ranked professions (Barnewall, 1988).

6. g) Family Size

Investor's family size is also effects their financial risk taking behaviour. Investors having small family size are more risk taker, where increase in family size caused risk aversion (Lease, Lewellen, and Schlarbaum, 1977).

7. III.

8. Objectives of the Study

Following objectives were framed from the present study:

? Find the effect of demographic factors on investor's decisions. ? Find the nature of association between demographic factors (Education, Age, Gender, Investment knowledge, investment experience, Occupation, marital status, Income level, and family size of investors) and investor's level of risk tolerance.

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Volume XIV Issue III Version I Year 2014 ( )

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10. Research Methodology

This study is primary data based involves to explored the effect of demographic factors on investors level of risk tolerance during investment decision making process. Data is collected from various respondents through a structured questionnaire. The Questionnaire contains open and close ended questions. Only those people were interacted who were interested in investment located in twin cities of Pakistan i.e. Islamabad and Rawalpindi. The total sample consisted of 100 respondents.

Males and females from different occupations and income levels are splits from different age groups and education levels. In this study Risk is consider as a dependent variable, while demographic factors individually checked as independent factors in relation with risk taking attitude of investors. In order to statistically check the results Chi-Square and correlation tests are used. These tests are also used by Jain, D.

11. (DATA FROM QUESTIONNAIRE) a) Association between investors gender and financial risk tolerance H0:

There is no significant effect of gender on risk tolerance during financial decisions. H1: There is significant effect of gender on risk tolerance during financial decisions. From Table 3: It is evaluated that the computed value of chi -square is 1.544 .Where tabulated value using 5% level of significance is 7.815.Computed value is less than tabulated value so we accept our H0 (null hypothesis) and concluded that there is no significant effect of gender on risk tolerance during financial decisions. Both male and female have same response toward financial risk tolerance.

Table 4 is revealing that there is a negative correlation between gender and financial risk tolerance.

Increase in investor's gender caused negative effect on investor's ability of financial risk tolerance.

12. b) Association between investors age and Financial risk tolerance H0:

There is no significant effect of Age on risk tolerance during financial decisions. H1: There is significant effect of Age on risk tolerance during financial decisions.

13. C

From Table 6: It is evaluated that the computed value of chi -square is 21.767 .Where tabulated value using 5% level of significance is 21.026.Computed value is greater than tabulated value so we reject our H0 (null hypothesis) and concluded that there is significant effect of Age on risk tolerance during financial decisions.

Table 7 is revealing that negative correlation is exist between Age of investors and financial risk tolerance. An Increase in age caused negative effect on investor's ability of financial risk tolerance.

14. c) Association between investors academic qualification and financial risk tolerance H0:

There is no significant effect of Academic qualification on risk tolerance during financial decisions. H1: There is significant effect of Academic qualification on risk tolerance during financial decisions. From Table 9: It is evaluated that the computed value of chi -square is 30.066.Where tabulated value using 5% level of significance is 16.919.Computed value is greater than tabulated value so we reject our H0 (null hypothesis) and concluded that there is significant effect of Academic qualification on risk tolerance during financial decisions.

Table 10 is revealing that positive correlation is exist between academic qualification and financial risk tolerance. An increase in Academic qualification caused a Positive effect on investor's ability of financial risk tolerance.

15. d) Association between investors annual imcome and financial risk tolerance H0:

There is no significant effect of income level on risk tolerance during financial decisions H1: There is significant effect of income level on risk tolerance during financial decisions. From Table 12: It is evaluated that the computed value of chi -square is 36.475, where tabulated value using 5% level of significance is 21.026.Computed value is greater than tabulated value so we reject our H0 (null hypothesis) and concluded there is significant effect of income level on risk tolerance during financial decisions.

Table 13 is revealing that Positive correlation is exist between income level of investors and financial risk tolerance. An increase in Level of income caused a positive effect on investor's ability of financial risk tolerance.

16. e) Association between marital status of investors and financial risk tolerance H0:

There is no significant effect of marital status on risk tolerance during financial decisions. H1: There is significant effect of marital status on risk tolerance during financial decisions. .620 N 100 100

From Table 15: It is evaluated that the computed value of chi-square is 3.423 .Where tabulated value using 5% level of significance is 7.815.Computed value is less than tabulated value so we accept our H0 (null hypothesis) and concluded that there is no significant effect of marital status on risk tolerance during financial decisions.

Table 16 is revealing that Positive correlation is exist between marital status and financial risk tolerance.

An increase in marital status caused a Positive effect on investor's ability of financial risk tolerance.

17. f) Association between investors investment knowledge and financial risk tolerance H0:

There is no significant effect of investment knowledge on risk tolerance during financial decisions. H1: There is significant effect of investment knowledge on risk tolerance during financial decisions.

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From Table 18: It is evaluated that the computed value of chi -square is 61.381, where tabulated value using 5% level of significance is 21.026.Computed value is greater than tabulated value so we reject our H0 (null hypothesis) and concluded that there is significant effect of investment knowledge on risk tolerance during financial decisions.

Table 19 is revealing that Positive correlation is exist between investment knowledge of investors and financial risk tolerance. An increase in knowledge caused a Positive effect on investor's ability of financial risk tolerance.

19. g) Association between investors occupation and finanical risk tolerance H0:

There is no significant effect of Occupation on risk tolerance during financial decisions. H1: There is significant effect of Occupation on risk tolerance during financial decisions. From Table 21: It is evaluated that the computed value of chi -square is 11.158, Where tabulated value using 5% level of significance is 21.026.Computed value is less than tabulated value so we accept our H0 (null hypothesis) and concluded that there is no significant effect of occupation on risk tolerance during financial decisions.

Table 22 is revealing that negative correlation is exist between occupation and financial risk tolerance.

An increase in occupation caused a negative effect on investor's ability of financial risk tolerance.

20. h) Association between investors investment experience and financial risk tolerance H0:

There is no significant effect of investment experience on risk tolerance during financial decisions. H1: There is significant effect of investment experience on risk tolerance during financial decisions. From Table 24: It is evaluated that the computed value of chi -square is 33.569, where tabulated value using 5% level of significance is 21.026.Computed value is greater than tabulated value so we reject our H0 (null hypothesis) and concluded that there is significant effect of investment experience on risk tolerance during financial decisions.

Table 25 is revealing that Positive correlation is exist between investment experience and financial risk tolerance. An increase in investment experience caused a Positive effect on investor's ability of financial risk tolerance.

21. i) Association between investors family size and financial risk tolerance H0:

There is no significant effect of Family size on risk tolerance during financial decisions. H1: There is no significant effect of Family size on risk tolerance during financial decisions. From Table 27: It is evaluated that the computed value of chi-square is 6.285 .Where tabulated value using 5% level of significance is 16.919.Computed value is less than tabulated value so we accept our H0 (null hypothesis) and concluded that there is no significant effect of family size on risk tolerance during financial decisions.

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Table 28 is revealing that negative correlation is exist between family size and level of risk tolerance. An increase in family size caused a negative effect on investor's ability of financial risk tolerance.

23. VI.

24. Conclusion

This study concludes that there is an association between demographic characteristics and investors level of risk tolerance. Result shows that demographic factors like investor's age, academic qualification, income level, investment knowledge, and investment experience have significant effect on the behaviour of investors. There is positive correlation between investor's academic qualification, income level, and investment knowledge and investment experience with their level of risk tolerance during the choice of investments. However investor's age shows slight negative correlation. Increase in age at one point caused a negative effect on risk taking behaviour of investors.

Other demographic factors like investor's gender, marital status, occupation and family size have no significant effect on investor's level of financial risk tolerance.

Figure 1.
a) Gender Among other demographic factors gender is the first effective differentiating and classifying factor (Bernasek et al. 1996) Because of the role of emotional Variables Risk attitudes differ between men and women (Loewenstein et al.2001) As compared to male investor female investors have wider risk aversion in different activities like financial decision making (Stendardi et al. 2002).
Figure 2.
b) Age
Older people tolerate more risk as compare to
the young investors (Grable and Lytton, 1999b: 7)
Young investor can not accurately assess about his
work performance as compare to older one. Old people
gain investment knowledge and experience, and make
better investment Choices (Kumar, and Korniotis, 2011).
In contrast some researchers found that increasing age of investors caused decrease in risk tolerance (Jiankopolos and Bernasek 2006).Further some researchers explored that investors age and financial Year 2014
risk tolerance have no significant relationship (Al-Ajmi,
2008: 21) (Anbar and Eker 2010: 505) Gumede (2009).
c) Education Third demographic factor which caused a higher financial risk tolerance during decision making process is education i.e. formal attained academic training (sung, Hanna, 1996). Level of education obtained and risk tolerance have a positive relationship (Kimball et al 2007: 20) (Graham et al. 2009). Contra-dictory results are also shown by some researchers, which are exploring that no significant relationship is exist between education and risk tolerance whilst the Strydom et al (2009) Gumede (2009: 27). Volume XIV Issue III Version I
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Figure 3. Table 1 :
1
Variables Number of Investors %Age
Gender Male 73
Female 27
Total 100 100
Age Below 30 years 42
30-40 years 26
40-50 years 18
50-60 years 12
60 or Above 60 years 02
Total 100 100
Marital Status Single 38
Married 62
Widow 0 0
Divorced 0 0
Total 100 100
Academic Qualification level Below Graduation 11
Graduation 43
Post Graduation 37
Others 9 9
Total 100 100
Income ( Per annum ) Below Rs. 160,000 33
Rs.1,60,000-Rs.3,20,000 12
Rs.3,20,000-Rs.4,80,000 25
Rs.4,80,000-Rs.6,40,000 14
Rs. 6,40,000 and Above 16
Total 100 100
Occupation Student 09
Professional 18
Business 14
Service 46
Others 13
Total 100 100
Investment Experience Below 1 year 30
1-4 Years 40
4-7 years 17
7-10 years 08
10 Years or Above 05
Total 100 100
Figure 4. Table 2 :
2
RISK Total
Below average Average Above average Very high
Male 31 28 10 4 73
GENDER Female 12 11 4 0 27
Total 43 39 14 4 100
Figure 5. Table 3 :
3
Value Df Sig.(2 sided)
Figure 6. Table 4 :
4
Gender Risk
Figure 7. Table 5 :
5
RISK Total
Below Average Average Above Average Very High
Below 30 years 19 18 5 0 42
Age 30-40 Years 8 9 7 2 26
40-50 Years 6 10 2 0 18
50-60 Years 8 2 0 2 12
60 Years and above 2 0 0 0 2
Total 43 39 14 4 100
Figure 8. Table 6 :
6
Value Df Sig. (2-sided)
Figure 9. Table 7 :
7
Age Risk
Figure 10. Table 8 :
8
Risk Total
Below average Average Above average Very high
Qualification Level Below graduation 11 0 0 0 11
Graduation 20 19 3 1 43
Post Graduation 9 18 7 3 37
Others 3 2 4 0 9
Total 43 39 14 4 100
Figure 11. Table 9 :
9
Value Df Sig. (2-sided)
Pearson Chi-Square 30.066 9 .000
Figure 12. Table 10 :
10
Education Risk
Note: ** . Correlation is significant at the 0.01 level(2-tailed).
Figure 13. Table 11 :
11
Risk Total
Below average Average Above average Very high
Below Rs. 160,000 23 8 2 0 33
Income Rs.1,60,000-Rs.3,20,000 6 6 0 0 12
Rs.3,20,000-Rs.4,80,000 7 11 6 1 25
Rs.4,80,000-Rs.6,40,000 3 10 1 0 14
Rs. 6,40,000 and Above 4 4 5 3 16
Total 43 39 14 4 100
Figure 14. Table 12 :
12
Value Df Sig. (2-sided)
Pearson Chi-Square 36.475 12 .000
Figure 15. Table 13 :
13
Income Risk
Figure 16. Table 14 :
14
Risk Total
Below average Average Above average Very high
Marital Status Single 17 14 7 0 38
Married 26 25 7 4 62
Total 43 39 14 4 100
Figure 17. Table 15 :
15
Value Df Sig. (2-sided)
Pearson Chi-Square 3.423 3 .331
Figure 18. Table 16 :
16
Marital Status Risk
Figure 19. Table 17 :
17
Risk
Figure 20. Table 18 :
18
Value Df Sig. (2-sided)
Pearson Chi-Square 61.381 12 .000
Figure 21. Table 19 :
19
Knowledge Risk
Pearson Correlation 1 .592**
Knowledge Sig.(2tailed) .000
N 100 100
Pearson Correlation .592** 1
Risk
Sig.(2tailed) .000
N 100 100
Figure 22. Table 20 :
20
Risk Total
Below average Average Above average Very high
Student 5 3 1 0 9
Occupation Professional 5 10 3 0 18
Business 4 5 3 2 14
Service 21 17 6 2 46
Others 8 4 1 0 13
Total 43 39 14 4 100
Figure 23. Table 21 :
21
Value Df Sig. (2-sided)
Pearson Chi-Square 11.158 12 .515
Figure 24. Table 22 :
22
Occupation Risk
Figure 25. Table 23 :
23
Risk Total
Below average Average Above average Very high
Less than 1 Years 17 9 4 0 30
Experience 1-4 Years 14 19 7 0 40
4-7 Years 6 8 2 1 17
7-10 Years 2 2 1 3 8
10 years or Above 4 1 0 0 5
Total 43 39 14 4 100
Figure 26. Table 24 :
24
Value Df Sig. (2-sided)
Pearson Chi-Square 33.569 12 .001
Figure 27. Table 25 :
25
Experience Risk
Figure 28. Table 26 :
26
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Figure 29. Table 27 :
27
Value Df Sig. (2-sided)
Pearson Chi-Square 6.285 9 .711
Figure 30. Table 28 :
28
Family Size Risk
1

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Notes
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Date: 2014-01-15