Individual investment behavior has recently attracted a great deal of attention from researchers in the fields of economics, psychology, and marketing. The literature review will include four areas: (a) psychological factors that affect investment tendency, (b) knowledge literacy that affect investment tendency.
Psychologists found that human beings do not behave as rationally as economists suppose. The occurring of stock market anomalies and empirical researches conducted by Babajide & Adetiloye (2012) and Bashir et al. (2013) revealed that investors are not always as rational as they are portrayed to be. These anomalies can be explained by, a new emerging area of finance, behavioral finance. To better understand investment intention, whether rational or not, psychological factors are necessary to be considered. One of the main purpose of this research is to investigate how psychological factors, particularly the motivation, mentality could possibly affect investment financial intention. The motivation will be measured in terms of the degree of risk the investor is willing to take.
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“The behavioral patterns associated with motivation are collectively referred to as personal investment” (Maehr & Braskamp, 1986, p. 45). Individual investment is a kind of behavior with a general purpose of decentralizing risks and an expectation of gaining benefits. Being defined as the process that initiates, guides, and maintains goal-oriented behaviors, motivation can be a good factor to analyze college students’ investment tendency, to make a choice what to invest. Motivation involves the biological, emotional, social, and cognitive forces that activate
...(which they do not control)” (Taleb). People should become more involved with the financial process. A person should save their money for the future instead of relying on investments to pay off. When investing they should choose things that are low risk and not take a large gamble.
Daniel Pink looks at extrinsic motivation and explains why it is wrongly treated by people. He points out that this kind of motivation is all about stimulating people’s behavior, that can be made by rewarding it financially or punishing them for not achieving their goal. When people are eager to meet a certain goal just for the end result- the financial reward, they change their focus and shift their attention. Instead of focusing on the experience of the activity that they are performing, their main thoughts will be only about the reward given after achieving their goal. Daniel Pink gives two examples of similar situations, one of them being a girl taking money for each math lesson she attends and the other being an industrial designer, promised financial reward, if he make a hit product. Both of them would definitely work hard in the short-term, focused on the awaiting reward,
As a recipient of many prestigious awards, including a Nobel Prize, psychologist Daniel Kahneman has worked rigorously for nearly 45 years to advance the way in which we understand human cognitive processes. Kahneman and his long time colleague, Amos Tversky, began working together in the 1970s and almost immediately began making an impact within the field of behavioral economics. These contributions centered around the notion of human irrationality, or the basis we subconsciously use to make decisions each day. Beginning with their discovery of anchoring effect, Kahneman and Tversky went on to uncover many intuitive theories that helped evolve the field of behavioral economics into what it is today. Of equal importance, Kahneman produced
Most recent theories on motivation conclude that people will start certain behaviors under the belief that this behavior will accomplish desired goals or outcomes. With Lewin (1936) and Tolman (1932) leading the charge, the goal-oriented behavior led researchers to want to understand more on the psychological value people attribute to goals, people’s expectations on reaching these goals, and the structures which keep people striving to achieve these goals. After some recent findings on goal-oriented behavior, researchers were able to differentiate different types of goals, whereas before researchers assumed that goals that were valued the same, with the same expectations of achievement, would need the same amount
Shermer, Michael. The mind of the market: how biology and psychology shape our economic lives. New York: Henry Holt and Co., 2009. Print.
question is, ‘why do people do what they do’? Motivation is the fuel that drives people towards
Although a college education grows more and more expensive every year. People begin to question whether college is a good idea to invest in or not. “As college costs continue to rise, students and their families are looking more carefully at what they are getting for their money. Increasingly, they are finding that the college experience falls short of their expectations”(Cooper. H Mary). Many people believe that the cost of a college degree has outstripped the value of a degree.Studies show that a college degree will increase your earning power. A lot of people say that a college degree now is worth what a high school diploma was wor...
Lei, Simon A. "Intrinsic and Extrinsic Motivation: Evaluating Benefits and Drawbacks from College Instructors' Perspectives." Journal of Instructional Psychology 37.2 (2010): 153-160. Academic Search Complete. EBSCO. Web. 7 Mar. 2011.
Deci, E. L., & Ryan, R. M. (1985). Intrinsic motivation and self-determination in human behavior. New York: Plenum
Various researches can determine possible reasons as to why consumers have quite a lot of trouble making financial decisions that can be the most beneficial later in life. In the context of savings for retirement, conclusions from a test reveal that self-regulatory state, possible future orientation and more and better financial knowledge can and most likely will influence a consumers intentions for retirement investments, for example, setting up a 401K in the USA. Other studies suggest consumers who show higher amounts of future orientation are usually more likely to start up a retirement plan. Studies also show that financial knowledge and financial orientation toward ones future can help to influence the chances of one participating in a 401K plan.
The greatest investors in the world all understand one common theme when it comes to successful investing, “markets are volatile and they fluctuate.” Whether it is real estate investing or investing in stocks, there is an inherent risk. Therefore, new investors who are trying to decide whether to invest their available capital in real estate or stocks must learn to understand their own risk tolerance. To understand risk successfully, new investors must first learn some of the pros and cons of both real estate investing and stock market investing.
A crucial reason in favour of mental accounting and overconfidence is decision efficiency. Real-life investing scenario changes every moment Time-consuming and systematic thinking process seldom is allowed during the intense decision-making (Stewart Jr et al., 1999, Busenitz and Barney, 1997). Additionally, the ‘small world’ used by the economic theory, which only applied to strict condition, is not necessarily applicable in the practical investment decision. As the assumption in those analysis approach may not conform with real life well and for most of times, cognitive heuristics is more suitable for the uncertainty(Gigerenzer and Gaissmaier, 2011). However, there is also a few argument against them, for it may hinder people from examining their investment choice thoroughly. Research shows that they did not perceive themselves as risk taker, but in fact, they are more likely to take relatively low return alternatives as ‘opportunities’, indicating that they are risk-taking to a great extent(Palich and Ray Bagby, 1995). As a result of the illusion created by such factors, decision makers tend to be narrow-minded in composing strategies and unable to bring enough information into thought(Schwenk, 1988). It was demonstrated by several researches that decisions made by means of biases and heuristics impose
There is a sense of complexity today that has led many to believe the individual investor has little chance of competing with professional brokers and investment firms. However, Malkiel states this is a major misconception as he explains in his book “A Random Walk Down Wall Street”. What does a random walk mean? The random walk means in terms of the stock market that, “short term changes in stock prices cannot be predicted”. So how does a rational investor determine which stocks to purchase to maximize returns? Chapter 1 begins by defining and determining the difference in investing and speculating. Investing defined by Malkiel is the method of “purchasing assets to gain profit in the form of reasonably predictable income or appreciation over the long term”. Speculating in a sense is predicting, but without sufficient data to support any kind of conclusion. What is investing? Investing in its simplest form is the expectation to receive greater value in the future than you have today by saving income rather than spending. For example a savings account will earn a particular interest rate as will a corporate bond. Investment returns therefore depend on the allocation of funds and future events. Traditionally there have been two approaches used by the investment community to determine asset valuation: “the firm-foundation theory” and the “castle in the air theory”. The firm foundation theory argues that each investment instrument has something called intrinsic value, which can be determined analyzing securities present conditions and future growth. The basis of this theory is to buy securities when they are temporarily undervalued and sell them when they are temporarily overvalued in comparison to there intrinsic value One of the main variables used in this theory is dividend income. A stocks intrinsic value is said to be “equal to the present value of all its future dividends”. This is done using a method called discounting. Another variable to consider is the growth rate of the dividends. The greater the growth rate the more valuable the stock. However it is difficult to determine how long growth rates will last. Other factors are risk and interest rates, which will be discussed later. Warren Buffet, the great investor of our time, used this technique in making his fortune.
Benabou, R. & Tirole, J. (2003) Intrinsic and Extrinsic Motivation', The Review of Economic Studies, vol.70, pg.489-520.
Pintrich, P. R. (2004). A conceptual framework for assessing motivation and self-regulated learning in college students. Educational Psychology Review, 16(4), 385-407.