June 29, 2005
Hong Kong: Citibank Study of Asian Investor Psychology Reveals Emotion Rules
Hong Kong – When it comes to money and investing, Asians can be overconfident, highly averse to loss and allow fear of regret to impact their investment decisions. A significant number of investors in Hong Kong, Singapore and Taiwan make financial decisions using their emotions, rather than relying on logical decision-making.
These are the key findings of a new, groundbreaking report, “The Emotion Behind Investing – A Citibank Study of Asian Investor Psychology.” The report examines investment behavior among Asians and provides a comparative analysis against US investor trends (based on other independent third-party journals). The first study of its kind in Asia Pacific, the report was prepared by Professor Anil Gaba, Professor of Decision Sciences and Dean of Faculty and Research at INSEAD’s Asia campus, along with two of his colleagues, Pierre Hillion, Professor of Finance, and Klaus Wertenbroch, Associate Professor of Marketing. Over 2,500 respondents across the three countries participated in the survey, collectively sponsored by Citibank, N.A., Citigroup Asset Management, Alliance Capital Management, and Permal.
According to Vineet Vohra, Regional Director of Investments Business for Citibank Consumer Group: ”As the leader in financial education, Citigroup believes it is important to show investors the impact of emotions on investment decisions and that impartial, objective counsel is necessary for prudent financial management. We will use the insights from this study to promote wider recognition of the concepts of investor psychology. Our objective is to guide our investors towards more appropriate financial solutions.”
Ricky Lin, Director of Investment Sales & Marketing for Hong Kong, Citibank Global Consumer Group, said: “This survey provides valuable information for us to develop products and structure them in such a way that they best suit the investment pattern and decision process of our customers. At the same time, it enables us to provide investment advice for investors to make the optimal investment decisions.”
"By adopting a disciplined investment strategy backed by proprietary industry research we are able to identify companies with attractive valuation, positive earnings revision and growth potential. Our investment approach enables us to identify stocks based on objective criteria thereby reducing the emotional bias that is often associated with stock selection," added Patrick Lee, Vice President and Senior Investment Analyst at Citigroup Asset Management.
“The Emotion Behind Investing” shows that, compared to investors in Hong Kong and Taiwan, Singaporeans are the most risk averse when it comes to potential gains but at the same time the most willing to take risks to mitigate losses. This suggests, for example, that Singaporeans are therefore inclined to sell performing investments too soon and hold on to their underperforming investments for too long. Also, the report reveals that Singaporean respondents are less savvy in combining different financial decisions in a portfolio approach, focusing instead on gains and losses of individual opportunities, and hence foregoing sure benefits from the portfolio approach. The respondents in Hong Kong and Taiwan show no significant difference in this respect.
To better understand the general risk behavior of Asians in the three markets, the report also compares the risk attitudes of the respondents in the domains of social risk and investment risk. Examples of social risk tested include approaching one’s boss for a raise, dressing in a revealing outfit and disagreeing with a parent on a major issue. The respondents in Taiwan show the least inclination to take social risks, with no significant difference between respondents in Hong Kong and Singapore. On the other hand, Singaporeans appear to have the least appetite for investment risk, with no significant difference between respondents in Hong Kong and Taiwan.
Overconfidence – Too Much Of A Good Thing?
Across the three countries, investors display a higher degree of overconfidence in terms of estimating uncertain quantities compared to similar reported levels in the US. Among all the survey respondents, Singaporeans exhibit the highest degree of overconfidence, followed by respondents in Hong Kong and then in Taiwan. This would indicate, for example, that investors in the three markets generally overestimate their ability to play the financial markets and would have a tendency to trade too much and too frequently, with such manifestation being the highest in Singapore.
Regret – Better Safe than Sorry?
The report also compares three types of regret often faced by investors: regret due to a missed investment opportunity that would have yielded a favorable outcome; regret due to an unfavorable outcome resulting from a self-made investment decision; and regret due to an unfavorable outcome resulting from an investment decision based on a financial advisor’s recommendation.
The polled respondents across the three markets appear to agree that unsatisfactory investments, or investments that didn’t meet their expectations based on one’s own decision, would be a greater cause for regret rather than missed investment opportunities that would have yielded favorable results. While this is consistent with what has been reported for investors in the U.S., the difference between the two types of regret is much less in these three markets than in the U.S., implying that missed opportunities are mulled over much more in these three Asian markets than in the U.S. In fact, in Hong Kong, the regret from missed opportunities is almost the same as self-made investment decisions turned bad.
Also, for Asians, the highest regret type is associated with disappointing investment recommendations provided by financial advisors. This is in sharp contrast to what has been generally reported in the U.S. studies. In the U.S., it appears that investors, when faced with unfavorable outcomes due to a financial advisor’s recommendation, take refuge in self-serving attribution. For example, if a financial advisor’s recommendation leads to a favorable outcome, the investors attribute it to their own skills; if the outcome is unfavorable, it is attributed to bad advice. Therefore, the regret type associated with a financial advisor’s recommendation which leads to an unfavorable outcome is lower than the regret type from a self-made investment decision with an unfavorable outcome. In the latter case, the investors have no one else to blame. This does not appear to be the case for the Asian investors in the study, suggesting that Asian investors generally view financial advisors differently than in the U.S. In general, Asian investors see financial advisors as sources of “hot financial tips” rather than long-term financial planning advice. The Hong Kong audience appears to be the most challenging market for financial advisors as investors in this market have higher expectations of their financial advisors.
"The ability to make the right investment decisions, consistently, has proven difficult for most investors. We believe that some fundamental investing principles like asset allocation and diversification can lead to positive long term results for all investors, retail and professional alike. We ourselves apply these guiding principles and disciplines in our investment process to mitigate against emotionally-biased decisions by our portfolio managers, and believe that our ability to provide a balance to the investment decisions of the investing public will be of great benefit," said Dokyoung Lee, Senior Vice President and Senior Portfolio Manager – Style Blend Services at Alliance Capital Management.
Hong Kong highlights from the report include:
- Hong Kong investors appear to be “financially savvy” and are inclined to consider investments on a longer-term basis than their counterparts.
- They are more likely to make accurate judgements of risks than Singapore investors but are less likely than Taiwan investors.
- They are relatively less likely to be affected by their emotions to take an irrational level of risk in a gain/loss situation. They are more likely to take social risks than Taiwan investors.
- They feel most regretful when they are advised wrongly by their broker/advisor/banker.
