05 Chapter 1
05 Chapter 1
05 Chapter 1
INTRODUCTION
1.1 Introduction
In the recent years, financial behaviour of investors has gained distinct prominence in
the academic research arena that dwells upon the ways people interpret and act upon
information for making investment decisions and saliently drifting away from the strict
compartmentation of ‘bounded rationality’ to include the role of several other
‘psychological’ influences that work upon him. It is well documented that there are
multitude of factors, such as nature of financial markets, investors own socio-
demographic and psychological profiles’, financial goals, time lines, disposable
income, risk appetite, attitude and belief systems that impact their investment decisions.
Within behavioural finance, it is assumed that the characteristics of market, individuals
and information structure influence investment decisions of individuals and market
outcomes as well. So, it is pertinent to conduct a comprehensive study delineating the
determinants affecting the financial/investment intention of investors with implications
drawn there upon the ever-evolving Indian financial market as well.
This study primarily intends to understand the role and influence of psychological
factors along with the demographic factors on the investment intention of the investors.
It purports to assess and validate the applicability of the extended Theory of Planned
1
Behaviour (TPB) in examining investor’s intention, and thereby financial behaviour;
along with considering the role of investor’s tendency towards saving, tendency
towards investment, their financial knowledge & interest, risk tolerance, financial self-
efficacy, attitude, subjective norms and perceived behavioural control of these investors
as determinants which are shaping their investment and varied intention behaviour.
The term financial system relates to a set of interrelated activities and services working
together to achieve some predetermined purpose or goal. It includes different markets,
the institutions, instruments, services and mechanisms which influence the generation
of savings, formulation of investment capital formation and its growth. (Pandey, et al,
2017)
Van Horne (2002) defined the financial system as- “the purpose of financial markets to
allocate savings efficiently in an economy to ultimate users either for investment in real
assets or for consumption”.
Christy (2000) has opined that the objective of the financial system is to "supply funds
to various sectors and activities of the economy in ways that promote the fullest possible
utilization of resources without the destabilizing consequence of price level changes or
unnecessary interference with individual desires."
According to Evensky, Horan & Robinson (2011) the primary function of the system is "to
provide a link between savings and investment for the creation of new wealth and to
permit portfolio adjustment in the composition of the existing wealth."
From the above definitions, it may be inferred that the primary function of the financial
system is the mobilisation of savings, their distribution for industrial investment and
stimulating capital formation to accelerate the process of economic growth.
Financial systems are vital to the capital formation, which is important for the fast
growth of economy and its development. A well-educated investor will resort to
systematic saving system, which in turn leads to income generating investment
2
alternatives. Thus, the financial wellbeing of households will certainly enhance the
welfare of the society. The capital markets are responsible for collecting savings from
the households and further distribute it for the industrial investment, accelerating the
economic growth by stimulating formation of capital.
1. Savings: forgone consumption in term of resources kept aside for some other
purpose.
2. Finance: those resources which are collected either through domestic savings or
specially assembled at bank deposits and further put to the investment.
Broadly Indian financial system has four components which are interrelated and are
delineated below:-
1. Financial institutions
2. Financial markets
3. Financial instruments, and
4. Financial services
Presently, India has a diversified financial sector undergoing rapid expansion, both in
terms of strong growth of existing financial services firms and new entities entering the
market. The sector comprises of commercial banks, insurance companies, non-banking
financial companies, co-operatives, pension funds, mutual funds and other smaller
financial entities. The banking regulator has allowed new entities such as payments
3
banks to be created recently and thereby adding to the types of entities operating in the
sector.
The growth of the financial sector in India at present is nearly 8.5% per year (FY 2018-
19). The rise in the growth rate indicates the growth of the economy. The financial
policies and the monetary policies are able to sustain a stable growth rate. The major
step towards opening up of the financial market was in furtherance of the nullification
of regulations restricting the growth in the financial sector.
There has been a spurt of various investment products with numerous options to lure
the investors to invest in India that has now increased manifolds. This poses several
challenges to a common person. The investor has not only to manage just his shares or
debentures but a portfolio of his investment plans ranging right from being a salaried
individual enjoying benefits of his dividends to retirement plans.
In fact, the investment scenario of Indian Financial market wears a new look, with an
overwhelming response not only from the Indian investors but also from the foreign
institutional investors. At the macro level also, investment decisions contribute
substantially in the economic development of a nation. But this is an element of offset
by high volatility and risk proneness that must be addressed correctly to reap rich
dividends to the multi stakeholders, especially the investors. This will enrich through
implications to academicians, investors and portfolio managers to understand the
reasons causing irrationality in the markets.
While savings are more in India, investment is a cause for concern. Investments by
households have been more into either bank fixed deposits, risk-free government-
backed securities and low yielding instruments, or in non-financial assets. A majority
of our households do not use modern financial markets.
As per RBI. (2003-04), only 1.4% of household savings were invested in equity, mutual
funds and debentures. Though this went up to about 4% in 2005- 06, it is still very
small. Indian households are generally net savers and suppliers of financial resources
for the rest of the economy. However, net financial assets of the households turned
negative (-7.3 percent of gross domestic product (GDP)) in the third quarter of 2016-
17, reflecting the transitory effects of demonetisation. With demonetisation, the
household sector’s net financial assets turned around and in the fourth quarter they
4
amounted to 14.8 percent of GDP. In 2017-18, the net financial assets of households
were estimated at 8.3 percent of GDP in Q2, up from 5.8 per cent of GDP in Q1.
The quarterly rate of net financial assets displays a high degree of volatility revealing
the shifts in preferences of households for the various instruments on both the assets
and liabilities side, which usually does not get captured in the annual data (Chart 1) .
Source: https://www.rbi.org.in/Scripts/BS_ViewBulletin.aspx?Id=17426
Source: https://www.rbi.org.in/Scripts/BS_ViewBulletin.aspx?Id=17426
5
1.1.2 Theory of Planned Behaviour & Investment Behaviour
In the literature, studies on investment behaviours have been conducted based mainly
on the theory of Reasoned Action (TRA) and the Theory of Planned Behaviour. (TPB)
(Sheppard, Hartwick & Warshaw, 1988). But most of these studies are carried out in
the west and very few studies exist in the Indian context. This necessitates a thorough
investigation of the the TPB model as applicable in the Indian context to shed light on
the financial investment behaviour of the investors. The basic distinction between the
two theories is that TRA is limited in the sense and it assumes that actions are totally
under volitional control, implying thereby that people/investors are rational in their
behaviour, hence they hold the ability to act and evaluate the available data as well as
account for the influence of their possible actions and then shape their behavior on such
reasoning decision (Fishbein & Ajzen, 1975; Ajzen & Fishbein, 1980).
The TPB (Ajzen, 1991), on the other hand overcomes this limitation in the TRA and
introduced ‘Perceived Behavioural Control’ as a control arm to attitude and subjective
behaviour dimension. So, perceived behavioural control includes those non-volitional
elements of uncertainty that are beyond individual’s volition, and thus reflecting the
perceived ease or difficulty associated with execution of future behaviour. The PBC is
especially relevant as investment decisions today are fraught with risks and uncertainty
(Thaler and Benartzi, 2004) and, on the contrary, because investors usually take into
account a wide range of factors in their decision-making process (Oberlechner and
Hocking, 2004). The conceptual framework of the present study is derived from the
much acclaimed TPB along with five additional constructs in explaining investors
behaviour. This provides a theoretical validation and extension of the TPB model in
explaining the financial behaviour of the Indian investors.
Over the years, TPB has been validated and found to be useful in understanding and
predicting human behaviours in various studies (Husin and Alrazi, 2017; Warsame and
Ireri, 2016; Kovac, Cameron, and Høigaard, 2016, Gopi and Ramayah (2007).
However, there has been a lack of studies that focuses on Indian investor’s
psychological determinants. In their observations of the Indian market, Kumar and
Goyal (2016) noted that investors followed a rational decision-making process when
6
investing but the behavioural biases of the individuals can arise at various stages of the
decision making. They found that this had impacted the different results found between
the genders. But there is hardly any Indian study that has linked the demographic
variables with the determinants affecting the investment intention of the investors. So,
it is imperative to conduct an empirical study in this perspective.
There are also studies (Prabhu and Vachalekar, 2014; Kumar and Rajkumar, 2014;
Subramanya and Murthy, 2013) that focussed on India with outcomes showing the
investment behaviour of Indian investors. However, these were mainly focussed on the
demographic profiles of the investors. The study of psychographic aspects that affects
the investor’s financial behaviour has not been validated on lines of the extended TPB
model in india. So, this study was necessitated to explain the financial behaviour of the
investors from both the demographic and psychographic angles to present a
comprehensive picture. Moreover, the study of determinants, specifically the
psychological aspects of investors, had not been significantly addressed yet. Therefore,
there is an imperative on the scholars for academic research to be conducted in this area
so as to establish the validity of the individual’s behavioural characteristics affecting
their investment decision making.
The first two constructs, i.e. Tendency towards savings and Tendency towards
investment have been taken into consideration mainly to align with Hilgert et al, (2003).
The Risk tolerance construct has been posited as a major determinant by researchers,
especially (Grable and Joo, 2000) and the same has been adopted in this study. Prior
studies have revealed that personal traits, emotions, past experiences and financial
knowledge as key determinants of investor’s risk-taking attitude and investment
decisions (Corter and Chen, 2006; Grable and Joo, 2000; Hunter & Kemp, 2004; Young
7
et al, 2012). The assumption drawn is that a person having higher financial risk
tolerance exhibits better financial behaviours.
Further, in this study, Financial knowledge has been clubbed with financial interest
which are also cited as determinants of financial behaviour. Financial knowledge is said
to be a key determinant affecting attitude and thereby, the Investment intention.
Financial knowledge can be acquired through i) formal sources, like education, training,
seminars, etc (Godwin 1994; Osteen et al., 2007, and Hogarth, 2006), ii) informal
sources, like parents, friends, peers, plus iii) one's own experiences. Prior research also
confirms that knowledge moderates the relation between attitudes and behaviour (Eagly
and Chaiken, 1993). That is, knowledge affects the direction and/or strength of the
relationship between attitudes and behaviours (Hogarth et al 2003) but in these studies
the direction of causality is unclear. In yet another salient study, Hilgert et al. (2003)
statistically linked the financial knowledge with various financial practices like cash-
flow management, credit management, saving and investment. These financial
practices actually constitute the financial behaviour of an individual.
Financial interests, on the other hand, relate to-- “individual‘s interest in financial issues
and exposure to the financial world.” This factor was studied by a researcher namely
(Beckett, 2000). They affirmed that an individual would be oriented towards finances
only if he is interested towards it. So, this study seeks to examine Financial interest and
knowledge as a key determinant affecting the investment intention of the investors.
Against this backdrop, this study tries to examine these determining factors impacting
the investment intention of the Indian investors along lines with the much acclaimed
TPB model along with five additional constructs, i, e. Tendency towards savings,
8
Tendency towards investment, Risk Tolerance, Financial Self efficacy, and Financial
interest & knowledge.
The decisions of investors play a significant role in defining the market trend, which in
turn has an influence on the economy. Individual investors engage in varied financial
instruments, so it is important to identify various socio-economic and psychological
parameters shaping their investment and behavioural intention. Prior research studies
have also affirmed the role and importance of understanding the determinants,
especially psychological factors (attitude, subjective norms, and perceived behavioural
control); affecting their investment behaviour. Then there have been studies advocating
the prominence of financial literacy to mitigate the risk element in investments. As ours
is a conservationist society relying more on savings so it is important to assess the
investor’s Tendency towards both savings as well as investments. Last but not the least,
investors’ financial interest and associated knowledge complied self-efficacy will
invariably exert an influence on their investment intention.
9
1.6 Overview of Research Methodology
In the present study, descriptive research design will be used. The descriptive research
entails a comprehensive assessment of the problem at hand and tries to arrive at the
results through a structured approach. In this study also, the theoretical background is
carefully elicited and quantitative research analysis is designed through statistical
testing administered on the responses collected through a set of survey instrument
containing questionnaires. The questionnaire of the study will be formed keeping in
mind all the objectives enumerated in 1.5 above the various objectives. It will be formed
using standard scales which were used earlier also in several studies and has been
adapted as per the research requirements in this case as well. The questionnaire will be
then administered to the target population using sampling techniques. The target
population will be the individuals who will be taking investment decisions either singly
or jointly in their households. The sampling techniques used in the present study will
be judgmental and snowball sampling techniques. The sample size will be determined
statistically and once the responses are collected then the data will be properly coded
and verified in advance before the analysis.
Questionnaire Items
● Gender
● Age group
● Education level
● Occupation
● Income
● Marital Status
● No. of dependents
10
● Financial Products
● Duration of investment
● Attitude
● Subjective Norm
● Risk tolerance
Last but not the least, the ‘Investment intention’ will entail the dependent (outcome)
construct of this study and the impact of the above-mentioned antecedent determinants
will be examined on to draw the insightful recommendations in this study.
As the next step, before testing the hypotheses the preliminary data screening and
testing would be done. The Kolmogorov-Smirnov test will be applied on data to check
the status of normality. After that, relevant statistical tools will have to be used to
analyse the data. The various statistical tools used to analyse the data were Exploratory
Factor Analysis, Confirmatory Factor Analysis, ANOVA, and Regression analysis. The
results of these statistical tools will finally be interpreted to draw meaningful inference
and implications for the different stakeholders.
These are individual-level processes and meanings that influence mental states
affecting financial decision-making behaviour. In this study, psychological factors will
11
include attitudes, subjective norms and perceived behavioural control (Ajzen, &
Fishbein, 1980).
1.7.2 Attitude
The Subjective norm refers to a perceived social pressure arising from one's perception
(Ajzen,
& Fishbein, 1980). In this study, subjective norms refer to the social influence of an
individual’s environment that affects their investment decision making.
It is defined as-- “the maximum amount of uncertainty a person is willing to take when
making a risky choice”. The assumption drawn, here is that a person having higher
financial risk tolerance is likely to exhibit better financial behaviours.
It relates to-- “individual ‘s interest in financial issues and exposure to the financial
world.” (Beckett, 2000). So, an individual would be oriented towards finances only if
he is interested in it.
12
1.7.7 Financial Self efficacy
This study is significant on several counts. In the first place, the study is relevant and
much called for in today’s era given the diverse array of financial instruments where
investment decisions become critical for gaining profits and even for security concerns.
The investors can understand ways to diversify their portfolio and also understand ways
to mitigate the risk element. Second, it prominently validates and extends TPB
framework in a unique way linking these constructs of Risk Tolerance, Financial
interest & knowledge, Attitude, Subjective Norms, and Perceived Behavioural Control
that has been untouched in extant studies. Besides, theoretical grounding and
justification, the study will be conducted methodologically and extensively culminating
in statistical analysis to draw meaningful inferences and provide recommendations.
Based on this the financial institutions can have better understanding and fulfill the
needs and expectations of their investors.
Chapter 1: Introduction
The first chapter through which this personal is progressing is basically the introductory
chapter which presents the overview of the entire study entailing the background of the
problem, theoretical framework and justification, statement of the problem, objectives,
research methodology to be adopted in the study. Besides, it also highlights the
significance of the study that sets the stage for the subsequent chapters.
13
Chapter 2: Review of Literature
Chapter two is the Review of literature. It extensively presents a detailed review of past
studies concentrating on the main constructs as used in the present study. Towards the
end, the research gaps will be pinpointed with the help of examining the earlier studies.
In this chapter, research design and research methodology to be used for this study will
be depicted. It includes steps detailing the research design, sampling methodology, data
collection instruments and establishing their reliability and validity through various
techniques used in this study.
In this chapter, detailed analysis of the study in the light of the objectives has been
discussed. The pertinent statistical analysis along with the interpretation has been
presented at length in this chapter.
This chapter presents the final conclusions and specific recommendations. In addition
to this, it also discussed the contribution of this study with respect to different
stakeholders. In the end, the chapter highlights the limitations of study and scope for
the future research.
14