The role of risk in investment behaviour and the manifestation of behavioural biases by individual investors

Suhobokov, Alexander (2021) The role of risk in investment behaviour and the manifestation of behavioural biases by individual investors. PhD thesis, University of Glasgow.

Abstract

I use a novel dataset based on 8,000 retail clients of a large brokerage house over four years to evaluate if individual investors take decisions according to one of the dominating decision-making theories – traditional Expected Utility Theory or behavioural Prospect Theory. Another key question of my research is the role of affect in judgements and its impact on investment results and behaviour.
The thesis includes three related empirical chapters. In the first empirical chapter, I explore how (ir)rational are retail investors and what are the boundaries of their rationality proxied with the relation between realised risk and return. In the second empirical chapter, I examine how the correlation between risk and return for the same group of investors varies in Live trading environment versus virtual Contest environment highlighting the role of emotions in correlation dynamics. In the third empirical chapter, I keep the emphasis on comparing Live and Contest investment settings, but now I evaluate the impact of emotions on profitability and various manifestations of risk behaviour.
My research contributes to the academic literature in the domain of finance and investments that is trying to establish the positioning and the role of emotional account in the judgement and decision-making of economic agents. I provide empirical evidence that feelings have a substantial impact on investment results and risk behaviour of individual traders. The empirical nature of my analysis involving a large group of private investors grants significant support to prior findings that predominantly developed using neuro-physiological, interview-type and experimental methodologies. Besides, I present empirical support for the long-lasting debate concerning traditional and behavioural financial theories. Analysing the relation between risk and return, I manage to validate that investors in my sample manifest all behavioural patterns implied by Prospect Theory: they are risk-averse in the gains domain, risk-seeking in the losses domain and exposed to the loss aversion bias.

• Item Type: Thesis (PhD)
• Qualification Level: Doctoral
• Keywords: behavioural finance, individual investors, individual decision making, risk-as-feelings.
• Subjects: H Social Sciences > HG Finance
• Colleges/Schools: College of Social Sciences > Adam Smith Business School > Accounting and Finance
• Supervisor's Name: Siganos, Dr. Antonios and Hung, Dr. Chi-Hsiou
• Date of Award: 2021
• Depositing User: Mr Alexander Suhobokov
• Unique ID: glathesis:2021-81951
• Copyright: Copyright of this thesis is held by the author.
• Date Deposited: 27 Jan 2021 17:52
• Last Modified: 28 Jan 2021 07:59
• Thesis DOI: 10.5525/gla.thesis.81951
• URI: https://theses.gla.ac.uk/id/eprint/81951