Investment experience influences investment behavior by shaping novice investors’ initial and later risk perceptions. To exploit this effect, this research employs both the Stock Investment Task (SIT) and Risk Probability Assessment Task to manipulate participants’ initial investing experiences.
Results indicate that personality traits, FRT, and financial overconfidence all mediate between psychological biases and perceived investment performance. Furthermore, individual stock investors appear to possess a learning mechanism which helps correct any deviations in their investment decisions by receiving continuous market feedback.
Risk Perception
Risk perception is the subjective analysis that people form of risks they perceive. It can be affected by various factors, including personality traits and socio-economic status; its outcomes affect investment performance. Many theories have been proposed to explain why people estimate risks differently, such as psychology approaches, sociology approaches and interdisciplinary ones.
For this study, a questionnaire was employed as the data collection method. To make filling it out easier for participants and maximise participation rates, this simplified form reduced time needed to finish it and enhanced participation rates; additionally it excluded biases such as framing and familiarity bias.
Results indicate that age, education level, gender and experience all influence an investor’s risk tolerance level. Experience also influences confidence levels and risk preferences; investors who have witnessed extreme outcomes are more likely to form unfounded beliefs and make decisions based on these events.
Investment Performance
Investment performance refers to the level of growth in an investor’s portfolio over time and can be measured either through dollar-weighted returns or time-weighted rates of return. Investors can improve their investment performance through managing risk through diversification, learning from past experience, incorporating past mistakes into future plans, and seeking professional guidance from financial experts.
Recent research indicates that different investor types tend to display unique patterns of purchasing and selling behavior based on their past returns. Foreign investors, for example, tend to exhibit momentum trading behavior–buying winning stocks while selling losers–while domestic investors such as households tend to take a contrarian stance. These differences in behavior were consistent across various past-return horizons suggesting these differences are driven by characteristics or behaviors unique to each investor type.
Personality Traits
Personality traits and mental biases play an integral part in investment decisions. Investors with more extrovert personality traits might be more inclined to succumb to herding behavior, which causes them to invest in the same stocks as their friends or pursue herd investments in social circles. Conversely, neurotic personalities might be less inclined to trade aggressively.
To investigate this possibility, we divided our sample into four clusters based on their personality traits and tested how these can impact investment performance. To our surprise, the cluster with highest openness to experience had the best returns: 1:1 market win rate and 5% above-market yield compared with low conscientiousness’ worst performing cluster: low chance of winning and below market yield; this suggests it’s essential to balance one’s personality with financial advice when investing.
Financial Overconfidence
Overconfidence in investment decisions is a common behavioral trait, yet few studies have examined its relationship to investor experience. Through various methodologies, this research seeks to ascertain whether investor experiences influence overconfidence. Antecedent and outcome variables were measured using Ul Abdin et al’s questionnaire; investment performance as an antecedent and risk propensity as an outcome were tested for item loading, reliability, and AVE before being scored as indicators of overconfidence in investment decisions.
Heuristics theory and overconfidence studies investigate decision-making processes such as shortcuts and rules of thumb in relation to decision making and cognitive processes, which people often rely on when making financial decisions. Understanding cognitive biases provides a pathway toward improving financial decision-making processes.
Age, gender and personality all play a role in investor overconfidence; for instance males tend to overestimate their abilities more than females (Baker et al., Citation2019) while extroverts are associated with overconfidence bias (Akhtar & Das, Citation2020). Furthermore, past investing and trading experience may impact one’s levels of investor overconfidence.
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