Role of Subjective Norm in Investment Decision Making of Casual Investors

Abstract

The concept of investment is not a new one. Indians are known for making investments in real estate and in animals (such as cows, buffaloes, horse, etc.). These investments were considered riskless and yielding good returns. However, in the modern scenario, investment has taken a different form. People hardly think about investing in animals, unless they have any specific business in mind. Investment in real estate is also being made available through mutual funds, which invest specifically in real estate. On a lookout for higher returns, investors are looking for stock markets which, though risky, yield high returns. Moreover, the trend is toward quick rich methods. And to cater to investor's demands, a number ofavenues have been opened up such as, share markets, real estate, insurance, etc. Although the form of investment is a change, the dilemma behind any investor is the same, i.e., Risk Vs Return. Investors want higher returns with minimal risk. However, high returns mean higher risk. The recent share market crash was a lesson in point. Within no time, the share market dropped from BSE 21000 to BSE 9000. Many investors lost their significant savings in an attempt to gain higher returns. To prevent such drastic incidents in life, investors being risk averse, develop an efficient portfolio for hedging against risk. Every investment instrument has some level of risk associated with it. For making optimal portfolio, investors have to include high-risk and low risk instruments. In general, investors are risk averse (Thaler, 1985) and hence, look for investments that offer high return on low risk. A number of portfolio management theories have been proposed to develop an optimal portfolio. Prominent among them are: Markowitz Portfolio Utility Theory (Markowitz 1952, 1959), Sharpe Single Index Model (Sharpe, 1963) and Capital Asset Pricing Method (Markowitz and Sharpe, 1964). These theories consider only risk and return as the major factor in identifying an optimal portfolio. However, a number of studies ( e.g., Alexander et al., 1997; Capon et al, 1994) reveal that risk and return are just two of the factors that influence investors investment decision. In fact, risk and return should be seen as a part of the framework of investment decision making. In other words, identifying an efficient portfolio is not enough for an investor to be able to make an investment decision. Moreover, a casual investor usually does not have access to these financial theories to make an investment decision (e.g., AI-Azmi, 2008; Alexander et al., 1997; Wilcox, 2003; Capon et al., 1994), nor are they sufficiently motivated to make elaborate calculations based on the above-mentioned theories. Other factors, such as peer influence (including close friends, relatives, etc.), recommendation of financial advisors (including those who sell policies), and market trends also play an important role in investment decision of a casual investor. This list is not exhaustive, and there may be other factors that influence the decisions of investors. In practice, a casual investor (whose decision-making is not a result of elaborate financial planning) rarely utilizes these theories to make an investment decision.