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1. Introduction
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Traditional finance theories such as Efficient Market Theory (Fama, 1965a;
1965b) and Modern Portfolio Theory (Markowitz, 1952) support the hypotheses of
rational investors and efficient markets. However, it is obvious that there are irrational
investors in the market, making random transactions that can not adequately be
explained by traditional finance theories (Chang, 2008).
Many scholars, such as Kahneman and Tversky (1979), believe that the study
of psychology and other social science theories can shed considerable light on the
efficiency of financial markets, as well as explain many stock market anomalies,
market bubbles and crashes. Thus, a relatively new theory, called behavioural finance,
has emerged in an attempt to understand the human psychological biases that are
related to the financial markets. In contrast to traditional finance, which examines
how people should behave in order to maximize their wealth, behavioural finance
investigates how people actually behave in a financial setting (Nofsinger, 2005a).
The Behavioural finance literature has developed a number of behavioural
concepts that explain investment behaviour. This paper reviews some of the most
significant and reliably measurable concepts to classify investors into profiles and,
then, to compare their personal characteristics and their trading behaviour. The
behavioural characteristics (concepts) that have been selected for classifying investors
into profiles are: Overconfidence (OV), Risk Tolerance (RT), Self-Monitoring (SM)
and Social Influence (SI). Thus, this paper examines whether the different
psychological and personal characteristics lead to differences in investment behaviour
and trading performance among the group of investors with different profiles. This
framework will, hopefully, help investors understand how biases and traits affect their
investment decisions. The paper is organized as follows: first, the paper discusses
selected psychological biases and personality traits that are involved in behavioural
finance. Then, a brief description of the methodology design is presented and finally
the results of the cluster analysis are presented.
2. Literature review
Although the relevant literature suggests that there are many factors affecting
people‟s behaviour, the emphasis there was to explore the most important
psychological biases and personality traits affecting investment behaviour. These are
Overconfidence, Risk tolerance, Self-monitoring and Social influence. An analytic
discussion follows in the next sections and an attempt is made to link them with
investment behaviour.
2.1 Overconfidence
Overconfidence causes investors to be too certain about their own abilities and
not to weight the opinion of others sufficiently. Furthermore, overconfident investors
under react to new information, or overweight the value of information, but they also
hold unrealistic beliefs about how high their returns will be (Barber and Odean,
2000). Chen et al. (2004) examined brokerage accounts in China and reported that
individual investors exhibit overconfidence.
In spite of the fact that some studies have found no difference in
overconfidence between men and women (Lundeberg et al., 2000; Deaves et al.,
2003; Biais et al., 2005), the majority of the literature suggests that men are
2
apparently more predisposed to overconfidence than women (Lundeberg et al., 1994;
Barber and Odean, 2001a). Barber and Odean (2001a) have found that males trade 45
per cent more actively than females, and earn lower returns, while Shu et al. (2004)
have shown that, even though men trade more excessively than women, their
performance is not dramatically lower than that of women.
This research assumes that Overconfidence leads to higher trading frequency
and volume. Deaves et al. (2003), and Grinblatt and Kelojarju (2009) for example,
have documented that overconfidence causes additional trading frequency. Glaser and
Weber (2007) have concluded that “The higher the degree of overconfidence of an
investor the higher her or his trading volume” (Glaser and Weber, 2007, 13).
Αdditionally, Dow and Gorton (1997) have found that trading volume increases when
individuals and insiders are overconfident. Moreover, Gervais and Odean (2001) have
found that overconfident investors trade too aggressively and this increases the
expected trading volume. A similar argument that overconfidence leads to greater
trading activity is made by Daniel et al. (2001), Hirshleifer and Luo (2001), Wang
(2001) and Scheinkman and Xiong (2003).
Research has shown that overconfidence leads not only to increased trading
activity but also to increased probabilities of taking wrong decisions (e.g. buying the
wrong stocks). For example, Odean (1998) supports that an overconfident trader
makes biased judgements that may lead to lower returns. Similarly, Fenton-O‟Creevy
et al. (2003) and Philip (2007) have documented that overconfidence has a negative
impact on trading performance. On the other hand, DeLong et al. (1990) and Wang
(2001) support that overconfident investors earn higher returns than less confident
investors.
Overconfident investors believe they can achieve high returns, thus they trade
often and they underestimate the associated risks (Benos, 1998; Odean, 1998; Wang,
2001). Barber and Odean (2001a) and Chuang and Lee (2006) argue that
overconfident investors underestimate risk and trade more in riskier securities.
have shown that, even though men trade more excessively than women, their
performance is not dramatically lower than that of women.
This research assumes that Overconfidence leads to higher trading frequency
and volume. Deaves et al. (2003), and Grinblatt and Kelojarju (2009) for example,
have documented that overconfidence causes additional trading frequency. Glaser and
Weber (2007) have concluded that “The higher the degree of overconfidence of an
investor the higher her or his trading volume” (Glaser and Weber, 2007, 13).
Αdditionally, Dow and Gorton (1997) have found that trading volume increases when
individuals and insiders are overconfident. Moreover, Gervais and Odean (2001) have
found that overconfident investors trade too aggressively and this increases the
expected trading volume. A similar argument that overconfidence leads to greater
trading activity is made by Daniel et al. (2001), Hirshleifer and Luo (2001), Wang
(2001) and Scheinkman and Xiong (2003).
Research has shown that overconfidence leads not only to increased trading
activity but also to increased probabilities of taking wrong decisions (e.g. buying the
wrong stocks). For example, Odean (1998) supports that an overconfident trader
makes biased judgements that may lead to lower returns. Similarly, Fenton-O‟Creevy
3
et al. (2003) and Philip (2007) have documented that overconfidence has a negative
impact on trading performance. On the other hand, DeLong et al. (1990) and Wang
(2001) support that overconfident investors earn higher returns than less confident
investors.
Overconfident investors believe they can achieve high returns, thus they trade
often and they underestimate the associated risks (Benos, 1998; Odean, 1998; Wang,
2001). Barber and Odean (2001a) and Chuang and Lee (2006) argue that
overconfident investors underestimate risk and trade more in riskier securities.
Last, the trend of using online brokerage accounts is making investors more
overconfident than ever before. Barber and Odean (2001b) have provided evidence
that investors, after going online, tend to trade more actively and their performance
drops. On the other hand, Choi et al. (2002) have investigated the performance of
online investors and found no significant difference in the performance of Web
traders and phone traders.
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research studies have found that people who are risk tolerant trade more often than
less risk-tolerant people (Tigges et al., 2000; Wärneryd, 2001; Clark-Murphy and
Soutar, 2004; Wood and Zaichkowsky, 2004; Durand et al., 2008).
2.4 Self-monitoring
Self-monitoring is a personality trait, a sort of social intelligence. It is a
disposition to attend to social cues and to adjust one‟s behaviour to one‟s social
environment (Biais et al., 2005). It refers to the sensibility for what is considered as a
desirable expressive behaviour in different situations and the ability to control and
modify this behaviour (Snyder, 1974). People high on self-monitoring have greater
social sensitivity than people low on self-monitoring (Snyder, 1987). Individuals high
on self-monitoring alter their expressive self-presentation for the sake of desired
public appearances and are, therefore, highly responsive to social and interpersonal
cues of situational appropriate performances (Snyder and Gangestad, 1986). On the
other hand, individuals low on self-monitoring are not able, or they have no
motivation, to control their expressive self-presentations. Therefore, their expressive
behaviour depicts their own feelings and thoughts, without being concerned much
5
about what would be right in the social sense.
This research assumes that high self-monitoring influences investors‟ trading
behaviour. Highly self-monitored people are less likely to underestimate the extent to
which other players‟ actions are correlated with their information (Eyster and Rabin,
2005) and, thus, they should avoid the winner‟s curse (because of incomplete
information and emotional bidders, there is a difficulty in determining an item‟s
intrinsic value). Indeed, Biais et al. (2005) have found that investors high on
selfmonitoring are unlikely to fall into winner‟s curse traps and behave strategically,
achieving high stock returns. Further, Alemanni and Franzosi (2006) have found that
self-monitoring increases trading frequency.
3. Methodology
This study attempts to group investors (individuals and professionals) into
different segments based on their psychological biases and personality traits and, then,
to examine whether, and how, these biases and traits drive their investment behaviour.
The selected factors that classify investors into profiles through cluster analysis are
the following: overconfidence, risk tolerance, self-monitoring and social influence.
This study makes an attempt to confirm the relationship between these factors, also
taking into account differences in the investors‟ profiles and their trading behaviour.
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<Table 1>
4. Results
Once the constructs had been defined, an overall score for each of them was
calculated. Cluster analysis examines whether respondents scored similarly on a set of
variables and seeks to identify a set of groups with the greatest possible distinction
(Keller and Siergist, 2006). This study used K-means cluster analysis because this
method is appropriate (unlike hierarchical clustering) for large data sets (N > 250).
Due to the fact that some variables were measured on different scales, they were
standardised to assume equal impact on the computation of the distances between
cases. A range (2–5) of clusters was tested and the greatest distinctiveness (with the
appropriate significance) among the groups was provided by a 3-cluster solution. The
results suggest that 3 significant subgroups exist within the investor sample, each with
different psychological and personality characteristics (Table 2).
In addition, an ANOVA test has shown a statistically significant difference (p
< 0.05) between the clusters for all the constructs (Table 3). Interpreting the results of
this table, each investor segment identified could be labelled as follows: high profile
investors, moderate profile investors and low profile investors. High profile investors
are those who have the following characteristics as far as the four main constructs
examined are concerned: high degrees of overconfidence, risk tolerance, selfmonitoring
and social influence. Moderate profile investors are those who score
moderately on overconfidence, risk tolerance, self-monitoring and social influence,
whereas low profile investors are those who have a low degree of overconfidence, risk
7
tolerance, self-monitoring and social influence. To validate the distinctiveness of the
clusters, independent sample t-tests were conducted on the mean ratings of each of the
four constructs between clusters (Table 3). The results indicate the existence of
statistically significant differences between each cluster (except for the risk tolerance
of low and moderate profile investors). We also ran crosstabulations between clusters
for several demographic and trading characteristics. A detailed discussion of the
findings from these analyses is provided in the next sections.
<Table 2>
<Table 3>
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associated with high risk tolerance and, more specifically, some research studies
conclude that overconfident investors underestimate risk taking (Barber and Odean,
2001a; Wang, 2001; Chuang and Lee, 2006). Additionally, a statistically significant
positive relationship has been found between overconfidence and risky assets, which
is similar to other studies (Benos, 1998; Odean, 1998; Wang, 2001). Moreover, selfmonitoring
(mean 11.52) and social influence (mean 16.05) are significantly higher in
the high profile investors‟ group compared with investors from the other two groups.
<Table 4>
<Table 5>
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the other profiles. There are previous studies that have examined the level of
investors‟ (in)experience and their risk (in)tolerance and have found that there is a
statistically significant relationship between these two parameters (Hong et al., 2000;
Lamont, 2002). Additionally, another parameter that may influence the level of risk
tolerance of investors in this profile is that the number of women included in this
profile is higher than in any of the other two profiles. Weber et al. (2002) and Grable
et al. (2004) claim that women are less risk tolerant than men. Also, low profile
investors are low self-monitoring (mean 8.52) investors and they have a significantly
lower degree of social influence (mean 11.28) compared with the other groups.
<Table 6>
High profile
This is the most experienced group as far as investments are concerned (70 per
cent of them have more than 10 years of investment experience). Regarding their
investment horizon, fewer of them (48 per cent) invest on a long-term basis,
10
compared with investors from the other profiles with a similar strategy. On the other
hand, the number of high profile investors following a medium-term investment
strategy is significantly higher (37 per cent) than the number of medium or low profile
investors who follow a similar strategy (Table 8).
Surprisingly, even though short-term investment was expected to be more
popular among high profile investors, since investors in this profile trade more
frequently, it was found that the percentage of them following this strategy is higher
(but with no significance) only compared with the percentage of moderate profile
investors who follow a similar strategy. This result contradicts that of Wood and
Zaichkowsky (2004), who found that overconfident investors have a shorter
investment horizon than low confident investors.
Moreover, they have a significantly higher portfolio value (average 111,136
euros) compared with low and moderate profile investors. The higher portfolio value
of this group may be explained by the large number of professional investors who are
included in this group. Sharma (2006) has found that professional investors invest
larger amounts than non-professional investors. Coval et al. (2005) also claim that
individual traders almost always trade smaller positions than professional traders.
Furthermore, high profile investors have higher stock volume (average 13,542
euros per transaction) compared with investors in the other 2 groups. Glaser (2003)
has documented that the higher the stock portfolio value, the higher is the average
trading volume per stock market transaction. In addition, there are lots of studies that
relate the high degree of overconfidence (high profile investors are overconfident) and
trading volume. For example, Dow and Gorton (1997), Gervais and Odean (2001) and
Glaser and Weber (2007) suggest that the higher the degree of one‟s overconfidence,
the higher the trading volume.
Additionally, they check stock prices more frequently (86 per cent of them
check stock prices daily) and, also, trade more frequently (32 per cent make stock
transactions at least weekly) than investors in either of the other 2 groups. This
trading behaviour may be the result of high overconfidence, high risk tolerance and
good investment experience. To support this argument, Deaves et al. (2003) and
Grinblatt and Keloharju (2009) have found that overconfidence increases trading
frequency. Moreover, a number of studies have shown that risk-tolerant investors
trade more frequently than risk-intolerant investors (Tigges et al., 2000; Wärneryd,
2001; Clark-Murphy and Soutar, 2004; Wood and Zaichkowsky, 2004; Dorn and
Huberman, 2005; Durand et al., 2008). Also, Shapira and Venezia (2001) have found
that professionals trade much more frequently than individuals. Further, Alemanni
and Franzosi (2006) have found that high self-monitoring (as high profile investors
have) increases trading frequency.
The most important finding is that investors from the high profile group report
significantly higher stock returns (average 21 per cent) and significantly more
profitable stock transactions (average 60 per cent) than investors in the other groups.
This is expected as there are other studies that underline the relationship between high
overconfidence and stock profits. DeLong et al. (1990) and Wang (2001), for
example, have found support for overconfident investors earning higher returns than
less confident investors. In addition, Biais et al. (2005) have found that high selfmonitoring
investors earn higher stock returns than low self-monitoring investors.
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Further, Statman and Thorely (1999) claim that high stock returns are correlated with
a high trading volume. The high stock returns of this group may again be explained by
the large amount of professional investors. Chan et al. (2004), investigating the mean
Monday returns, have found that professional investors‟ stock portfolios earn higher
returns than the non-professional investors‟ stock portfolios. Additionally, Kourtidis
et al. (2011), comparing professional and individual investors, have shown evidences
that professionals have higher performance than the individual ones as far as stock
trading is concerned.
What was probably not expected is the favourable investment policy the
people of this group prefer. It is found that 60 per cent of them prefer the “wait and
see” policy. However, another 63 per cent (the sum is higher than 100 per cent
because they could choose more than one option) make use of the target price (25 per
cent), max profit (19 per cent) and stop loss (19 per cent) investment policies. It is
reasonable then to assume that most of the high profile investors always have in mind
a “plan B” strategy. Of course, this plan “B” seems to differ depending on the profile
each investor belongs to. More specifically, high profile investors prefer the “target
price” policy, while moderate profile investors prefer the “max profit” policy. On the
other hand, low profile investors definitely prefer the “stop loss policy”.
The most significant sources of information are the fundamental and technical
analyses (64 per cent) followed by balance sheets (54 per cent) and financial
announcements (42 per cent). These sources have a significantly greater impact on
high profile investors than on investors of either of the other 2 profiles. This was
rather expected since high profile investors trade more frequently than other investors.
Wood and Zaichkowsky (2004), for example, have found that overconfident investors
(as high profile investors are), rely more heavily on financial statements.
The investment decision making of most (28 per cent) of the high profile
investors is mainly influenced by the environment of the Athens Stock Exchange.
Stock prospects, their personal and psychological status and stock returns are the
other more influential parameters. In addition, almost half (46 per cent) of the high
profile investors admit that they insist on holding or even buying specific stocks
despite their consistently bad performance. Surprisingly, almost the same number (52
per cent) of the moderate profile investors but only 30 per cent of the low profile
investors exhibit a similar investment behaviour.
<Table 9>
Moderate profile
The investment experience of moderate profile investors is significantly less
than high profile investors (only 47 per cent have more than 10 years of investment
experience) but significantly higher than low profile investors. They have a moderate
portfolio value (62,211 euros) which is significantly less than the portfolio value of
high profile investors but (insignificantly) higher than the portfolio value of the low
profile investors. Their stock volume (6,599 euros per transaction) is significantly less
than that of the high profile investors but it does not significantly differ from that of
the low profile investors. Furthermore, the frequency of stock transactions, the level
of stock returns and the profitable stock transactions are moderate (significantly
different compared with the investors of the 2 other profiles except for profitable
stock transactions between the moderate and low profiles) compared with the stock
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returns of the investors in the 2 other profiles (Table 4). Moderate profile investors
have also reported that their preferred investment policy is “wait and see” (53 per
cent). In the second place of their preferences is the max profit policy (23 per cent),
which is different from the second option of the high profile investors (target price, 25
per cent) and the low profile investors (stop loss, 23 per cent).
Further, as far as the sources on investment information are concerned,
moderate profile investors are significantly influenced by financial announcements,
fundamental and technical analyses and balance sheets but also by TV news,
newspapers and the Internet. In addition, stock prospects and the Athens Stock
Exchange environment have a significant impact while personal and psychological
reasons also play their role in the decision-making process of investors in the
moderate profile group.
Low profile
Low profile investors have less investment experience than investors in any
other group (only 30 per cent have more than 10 years of investment experience).
They check stock prices rarely (37 per cent of them check stock prices daily) and also
invest in stocks rarely (only 4 per cent of them make stock transactions daily while 64
per cent of them semi-annually). This may be explained by the risk intolerance that
characterizes investors in this profile.
A number of studies have shown that risk-intolerant investors trade less
frequently than risk-tolerant investors (Tigges et al., 2000; Wärneryd, 2001; Clark-
Murphy and Soutar, 2004; Wood and Zaichkowsky, 2004; Dorn and Huberman, 2005;
Durand et al., 2008). Moreover, this would be a result of the large number of
individuals in the profile. Shapira and Venezia (2001) have found that individuals
trade less frequently than professionals.
Furthermore, low profile investors have a significantly lower portfolio value
(32,845 euros) and lower stock volume (6,421 euros per transaction) than high and
profile investors and medium profile investors (with the exception of stock volume,
which is not statistically significantly different from that of moderate profile
investors). The low portfolio value of this group may again be explained by the large
amount of individual investors, which is in line with Sharma (2006). For example,
Coval et al. (2005) and Sharma (2006) claim that individual investors trade smaller
positions than professional investors. The main finding is that stock returns (9.81 per
cent) are significantly less than those of investors in any other group, while the
profitable stock transactions (52.53 per cent) are significantly lower compared with
those of high profile investors (there was no statistically significant relationship with
moderate profile investors). This may be explained by the low confidence level that
low profile investors have. DeLong et al. (1990) and Wang (2001) suggest that less
confident investors earn lower returns than overconfident investors. In addition, Biais
et al. (2005) have found that low self-monitoring investors earn lower stock returns
than high self-monitoring investors.
Further, they have a higher level of short-term investments compared with
moderate profile investors, which is also slightly higher than the high profile
investors. On the other hand, there is a significantly lower level of medium-term
investments compared with high profile investors (there is no statistically significant
13
difference from moderate profile investors). Their sources of investment information
mainly include newspapers (44 per cent) and TV news (36 per cent) and the impact of
friends is significantly higher than in any other investors‟ profiles (maybe because
they have lower investment experience).
As far as the investment policy followed is concerned, while low profile
investors prefer (except for the “wait and see policy” of 70 per cent) the stop loss
policy (23 per cent), there is no significant difference between all the other investors‟
profiles. Additionally, they have a significantly lower preference for max profit (10
per cent) and target price policy (4 per cent) compared with the other investors‟
groups.
Low profile investors reported that mainly the Athens Stock Exchange has a
significantly greater impact on their investment decision making than high profile
investors (without having a statistically significant difference from the moderate
profile). Specifically, low profile investors are more influenced by their liquidity than
the other two groups. This was expected since this group has a lower income level.
Additionally, investors with a low profile who insist on buying specific stocks (in
spite of their bad performance) are fewer than the investors from the other two
profiles who have the same investing behaviour.
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profiles. Thus, these investors own high-value portfolios, trade high volumes of stocks
and make transactions more frequently compared with investors from the other
profiles. Therefore, high trading frequency and high stock volume do not negatively
affect investment performance but may lead, under specific conditions, to a better
performance. Also, high risk taking and high overconfidence seem to influence stock
returns positively (high profile investors‟ results).
Furthermore, high profile investors, among other sources of investment
information, emphasize the information provided by fundamental and technical
analyses and, generally, financial statements. Some other characteristics of investors
in this profile are the target price investment policy they adopt and their large
investment experience. High profile investors‟ trading behaviour may be explained by
the large proportion of professional investors (Shapira and Venezia, 2001; Sharma,
2006) who are included in this group, but also by their high degree of overconfidence,
risk tolerance and self-monitoring (Wang, 2001; Biais et al., 2005; Dorn and
Huberman, 2005; Durand et al., 2008; Grinblatt and Keloharju, 2009). On the other
hand, low profile investors underperform in stock markets, trade rarely and their
major characteristics, compared with the investors in other groups, are their low
scores on psychological biases, personality traits and investment experience.
Additionally, moderate profile investors‟ level of psychological biases, personality
traits and trading performance is somewhere between the high profile and low profile
levels.
This is an exploratory study to be used as a starting point for the understanding
of the characteristics (Overconfidence, Risk Tolerance, Social Influence, Self-
Monitoring) of investors (including both individuals and professionals) and their
trading behaviour. The results show that high scores on psychological biases and
personality traits (thus Overconfidence, Risk Tolerance, Social Influence and Self-
Monitoring) are associated with high scores on aspects of trading behaviour such as
trading performance, trading frequency and trading volume. This study may provide
investment advisors with a framework to understand clients‟ attitude and thus allow
advisors to give better advice to their clients depending on each client‟s profile.
Finally, this study also offers insights into investors, as they can understand the
trading behaviour of each investor‟s profile and compare it with their own investment
characteristics, their trading behaviour and their performance. Ultimately, it will
provide a framework that will help investors understand how biases and traits affect
investment decisions and thus they may be able to become aware of and overcome
them.
One major limitation of this study is that it is based on the self-assessed biases,
traits and trading behaviour of each respondent. It is important for future research to
be directed towards collecting more objective data as far as these crucial parameters
are concerned.
Moreover, it is not clear which are the stronger parameters that actually
influence trading behaviour. Further research could expand the scope of this research
by examining the magnitude of the effect of these parameters on investor trading
behaviour. Also, a direct comparison between individual and professional investors‟
trading behaviour would enhance our knowledge/comprehension of investors‟ trading
behaviour.
15
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