MAKERERE UNIVERSITY BUSINESS SCHOOL

INVESTOR AWARENESS, PERCEIVED RISK ATTITUDES, AND STOCK MARKET

INVESTOR BEHAVIOUR

A CASE OF UGANDA SECURITIES EXCHANGE

BARBARA WANYANA

2007/HD10/11410U

SUPERVISOR: DR. ISAAC NKOTE NABETA

DR. JOSEPH NTAYI

ARESEARCH REPORT SUBMITTED TO GRADUATE RESEARCH CENTRE IN

PARTIAL FULFILMENT FOR THE AWARD OF THE DEGREE OF MASTERS OF

SCIENCE IN BANKING AND INVESTMENT OF MAKERERE UNIVERSITY

AUGUST 2011

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DECLARATION I, Wanyana Barbara, declare that the work presented is an original copy and has never been

presented for any other degree of award in any institution of higher learning or for any other

reason whatsoever.

Signature: …………………………………………………………………………………..

Wanyana Barbara

2007/HD10/11410U

Date: ……………………………………………………………………….……………….

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APPROVAL This is to certify that this research report has been submitted with my approval as university

supervisor:

Signature: ……………………….…………………………….………………….

Dr. Nkote Isaac

Makerere University Business School

Date: ………………………………….………………………………………….

Signature: ……………………….…………………………….………………….

Dr. Ntayi Joseph

Makerere University Business School

Date: ………………………………….………………………………………….

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DEDICATION To my loving husband, Mr. Ssemakula Francis and my dear children Felisha and Francis Xavier

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ACKNOWLEDGEMENTS I wish to thank my mum who has always supported me in my goals and equally encouraged me

in my studies.

Thanks to my husband who has always stood by me and encouraged me throughout my studies.

Thanks to the rest of my family especially my in-laws Charles and Patrick, brothers; Phillip and

James, and sister Rita who amidst their complaints of me spending so much time on this

research, still encouraged me.

I wish to acknowledge the support of my supervisors, Dr. Nkote and Dr. Ntayi who tirelessly

encouraged and guided me in the completion of this research and was always available to tune

me in the right direction.

I wish to recognise the support and encouragement I received from my friends- Racheal

Mirembe, Mbowa Peter and Omiel Andrew.

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TABLE OF CONTENTS DECLARATION ................................................................................................................................ii

APPROVAL ...................................................................................................................................... iii

DEDICATION ................................................................................................................................... iv

ACKNOWLEDGEMENTS .............................................................................................................. v

TABLE OF CONTENTS .................................................................................................................. vi

LIST OF TABLES .............................................................................................................................. x

ABSTRACT ........................................................................................................................................ xi

CHAPTER ONE ................................................................................................................................. 1

INTRODUCTION .............................................................................................................................. 1

Background of the Study ................................................................................................................... 1

1.2 Statement of the Problem ............................................................................................................ 3

1.3 Purpose of the Study .................................................................................................................... 3

1.4 Research Objectives ..................................................................................................................... 4

1.5 Research Questions ...................................................................................................................... 4

1.6 Scope of the Study ........................................................................................................................ 4

1.7 Significance of the Study ............................................................................................................. 5

1.8 Conceptual framework ................................................................................................................ 5

CHAPTER TWO ................................................................................................................................ 7

LITERATURE REVIEW .................................................................................................................. 7

2.1 Introduction ................................................................................................................................... 7

2.2.1 Social Learning .......................................................................................................................... 8

2.2.2 Financial Awareness ................................................................................................................. 9

2.2.2.1 The Determinants of Financial Awareness ...................................................................... 10

2.3 Perceived Risk Attitudes ........................................................................................................... 12

2.3.1 Affect ......................................................................................................................................... 12

2.3.1.1 The Affect Heuristic ............................................................................................................. 13

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2.3.2 Cognition................................................................................................................................... 14

2.4 Investor Behaviour ..................................................................................................................... 16

2.4.1 Psychological biases ................................................................................................................ 17

2.4.2 Social and Emotional influences ........................................................................................... 23

2.5 Investor Awareness and Perceived Risk Attitudes ............................................................... 28

2.6 Perceived Risk Attitudes and Investor Behaviour ................................................................ 30

2.7 Investor Awareness, Perceived Risk Attitudes and Investor Behaviour ........................... 34

CHAPTER THREE.......................................................................................................................... 36

METHODOLOGY ........................................................................................................................... 36

3.1 Introduction ................................................................................................................................. 36

3.2 Research Design .......................................................................................................................... 36

3.3 Study Population ........................................................................................................................ 36

3.4 Sampling Design and Sample Size ........................................................................................... 37

3.5 Data Sources ................................................................................................................................ 37

3.6 Data Collection Instruments ..................................................................................................... 38

3.7 Measurement of Variables ........................................................................................................ 38

3.8 Validity and Reliability Test ..................................................................................................... 39

3.10 Anticipated Limitations ........................................................................................................... 40

CHAPTER FOUR ............................................................................................................................ 41

RESULTS AND FINDINGS OF THE STUDY ........................................................................... 41

4.1 Introduction ................................................................................................................................. 41

4.2 Sample Characteristics .............................................................................................................. 41

4.2.1 Response Rate .......................................................................................................................... 41

4.2.2 Age Group of Respondents .................................................................................................... 41

Table 4.1: showing age group of Respondents ............................................................................. 42

4.2.3 Gender of the Respondents .................................................................................................... 42

4.2.4 Highest Level of Education .................................................................................................... 42

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4.2.5 The stocks traded in by Respondents ................................................................................... 43

4.2.6 The Brokerage firm trading with ......................................................................................... 44

4.2.7 How often do you trade on the USE? ................................................................................... 45

4.3 Factor Analysis Results ............................................................................................................. 46

4.3.1 Investor Awareness ................................................................................................................. 46

4.3.1.1 Social Learning ..................................................................................................................... 47

4.3.1.2 Financial Awareness ............................................................................................................ 47

4.3.2 Factor Analysis for Perceived Risk Attitudes ..................................................................... 48

4.3.2.1 Affective ................................................................................................................................. 48

4.3.2.2 Cognitive ................................................................................................................................ 49

4.4 Relationship between the variables ......................................................................................... 50

4.4.1 The Investor Awareness and Perceived Risk Attitudes about the USE ......................... 50

4.4.2 The Perceived Risk Attitudes and Investor Behaviour on the USE ................................ 50

4.5 The Investor Awareness, Perceived Risk attitudes affect Investor Behaviour ................. 52

4.5.1 Regression Model for the components of Investor Awareness and perceived risk attitudes with stock market Investor Behaviour as the dependent Variable .......................... 52

4.5.2 Regression Model .................................................................................................................... 53

CHAPTER FIVE .............................................................................................................................. 54

DISCUSSION, CONCLUSIONS AND RECOMMENDATIONS ............................................ 54

5.1Introduction .................................................................................................................................. 54

5.2 Discussion of findings ................................................................................................................. 54

5.2.1 The relationship between Investor Awareness and Perceived Risk Attitudes on the USE ..................................................................................................................................................... 54

5.2.2 The relationship between Perceived Risk Attitudes and Investor Behaviour on the USE ..................................................................................................................................................... 54

5.2.3 The extent to which Investor Awareness, Perceived Risk Attitudes affect Investor behaviour on the USE ...................................................................................................................... 55

5.3 Conclusions .................................................................................................................................. 56

5.4 Recommendations ...................................................................................................................... 57

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5.5 Areas for further research ........................................................................................................ 58

REFERENCES.................................................................................................................................. 59

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LIST OF TABLES Table 3.1: Sample Size selection……………………………………………………………37

Table 4.1: Age Group of Respondents……………………………………………………...42

Table 4.2: Gender of Respondents………………………………………………………….42

Table 4.3: Education level of Respondents…………………………………………………43

Table 4.4: Stocks Traded by Respondents………………………………………………….44

Table 4.5: Brokerage Firms of Respondents………………………………………………..44

Table 4.6: Frequency of Trading by Respondents…………………………………………..45

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ABSTRACT The purpose of the study was to examine the level to which investor awareness, and perceived

risk attitudes affected stock market investor behaviour on the Uganda Securities Exchange

(USE). The study was initiated because although the Uganda Securities Exchange opened in

1997, only fourteen companies are currently listed with relatively a growing number of investors

whose trading patterns are uncertain and not clear yet the securities market has potential to grow

bigger than it currently is.

A cross sectional quantitative research design was used. Using a proportional random sampling

approach, a sample of 86 investors was selected from USE. The research instrument was a self

administered questionnaire which sought responses on investor awareness, perceived risk attitudes

and stock market investor behavior on the USE. Forty five (45) fully filled questionnaires were

returned, giving a response rate of 45%.

Investor awareness was found to significantly predict 50.2 percent of the variance in stock market

investor behaviour on the USE and perceived risk attitudes was found to significantly predict 9.1

percent of the variance in stock market investor behaviour.

The results on the relationship indicated that the investor awareness and perceived risk attitudes

are negatively related to stock market investor behaviour.

In light of the findings, various recommendations are suggested on how best investors can make

use of available information to make objective investment decisions on the USE. This will help

in encouraging potential investors in investing on the securities market.

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CHAPTER ONE

INTRODUCTION

Background of the Study Individuals have become increasingly active in financial markets and market participation has

greatly been promoted by invention of new financial products (Rooij and Lusardi, 2007).

However, majority of investors tend to utilize a limited subset of information in the markets

hence having uninformed competing investors/ traders (Glosten and Milgrom, 1985). In reality,

investors do not receive all information freely; they have to decide whether and which

information to gather prior trading and investors end up staying afloat in a sea of uncertainty

(Gary and Uri, 2003) which in turn affects their level of awareness.

Awareness refers to the consciousness about a given aspect (Levine, 2007). According to Luigi,

Sapienza and Zingales (2005), individuals who are knowledgeable are significantly more likely

to buy stocks and risky assets and also invest in stock. In order to enhance awareness of the

capital markets in the communities, the USE has put in place programs such as annual financial

literacy weeks, issuing of annual reports and Quarterly bulletins among others.

Empirically, there is evidence that investors have a bias to invest in stocks of companies they are

more familiar with (Zhu, 2005). Traditionally, this has been interpreted as evidence of Merton’s

(1987) model of investors with limited information. And any additional private information a

trader may have will determine his belief about asset’s expected cash flows hence affecting

investor’s perceived risk attitude.

Perceived risk attitude addresses a person’s judgment (belief and opinion) towards taking or

avoiding risk when making decisions under uncertain outcomes (Bernd, 2004). The classical

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theorists argue that differences in attitudes to risk affect the allocation of wealth between safe

and risky assets, but not the particular asset selected. However, Elke and Richard (1997), assert

that the decision to accept a particular asset and the willingness to pay for the asset depends on

the investor’s risk perception. Investors’ perceptions of the riskiness of choice alternatives

always differ significantly from individual to individual depending on a person's beliefs, and

reference point (Bottom 1990).

An investor’s perceived risk attitude is usually determined by either affect/emotions or his

cognitive ability. And this makes perceived risk attitudes of investors to be more subjective

rather than objective to risky situations. According to Zajonc (1980); LeDoux (1996), emotional

reactions are predominant at a very early stage and are more basic than cognitive evaluations.

Under such circumstances, investors are prone to unjustified beliefs and may resort to ‘rule of

thumb’ hence making sub-optimal (irrational) investment decisions (Gary and Uri, 2003).

Investors are therefore likely to base on psychological or social and emotional factors to make

decisions. And this may affect the trading behaviour of stocks in the market; for instance, over a

two year period (2007-2008), the persistent growth in firm’s operations as depicted from their

financial statements over the period led to continuous increase in prices of UCL and BOBU

shares from shs2,325 to shs11,295 and shs1,000 to shs5,560 respectively which may have

indicated investor under reaction. On the other hand, BATU share exhibited the same price

(shs4,70) for the first half of the FY2007, however, the onset of news about decline in the firm’s

operations with closure of one of its branches (Jinja) led to a decline in share price to shs3,30 by

Oct.2007 and later increased gradually. By March 2008, the share price was shs1,500 and by the

beginning of the last quarter of FY 2008, the share price had declined to shs1, 020 until shs800 in

Jan 2009 which may have indicated an overreaction (USE Annual Report 2007, 2008, 2009).

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1.2 Statement of the Problem Although the USE has registered some successes through holding public awareness conferences,

and workshops, it is still faced with a challenge of public awareness, (Opagi, 2007). The market

still exhibits a low level of awareness and limited appreciation of the role of capital markets with

varying investor risk attitudes which has affected the making of proper investment choices by

individual investors. Trading of securities is frequently assumed to be majorly influenced by

irrational behaviour which may affect the trading volumes and prices of stock in the market; for

example, the stock market registered an increase in shares traded from 7,715,000 in FY2004/5 to

273,942,000 shares in 2006/7 which may have indicated over confidence of the investors. On the

other hand, the success of Dec. 2007 Stanbic Bank IPO renewed interest and awareness about the

financial market leading to the continuous rise in Stanbic Bank’s shares traded from FY 2007

until 2nd quarter of FY 2009 (73.96% of turnover) which may have depicted herd behaviour in

the market. By the end of FY 2008, volume of shares traded declined from 48.7 million shares to

21.7 million which may have depicted loss aversion of investors and in the first quarter of 2009,

the market exhibited a slight rise in volumes traded to 35.2 million shares followed by a drop in

volumes to 24.5 million shares by the 2nd quarter of the FY 2009 (USE Annual Reports 2007,

2008, 2009).

1.3 Purpose of the Study The purpose of the study was to examine how investor awareness and perceived risk attitudes

affect investor behaviour while trading stocks on the stock market (USE).

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1.4 Research Objectives (i) To determine the relationship between investor awareness and perceived risk attitudes about

the USE.

(ii) To examine the relationship between perceived risk attitudes and investor behaviour on the

USE

(iii) To establish the extent to which investor awareness, perceived risk attitudes affect investor

behaviour on the USE.

1.5 Research Questions (i) What is the relationship between investor awareness and perceived risk attitudes?

(ii) Do investor perceived risk attitudes affect investor behaviour?

(iii) To what extent does investor awareness, perceived risk attitudes affect investor behaviour on

the USE?

1.6 Scope of the Study Geographical Scope

The study will be conducted in the central region of Uganda (Kampala).

Subject Scope

The study examined the relationship between investor awareness, perceived risk attitudes and

investor behaviour on stock markets (USE). Investor awareness addressed aspects of financial

awareness, social learning while investor behaviour was be measured basing on investors

psychological and emotional/social aspects of behaviour. Perceived risk attitudes looked at

investor’s perception as driven by both affective and cognitive factors leading to risk averse, risk

neutral or risk taking investors.

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1.7 Significance of the Study (i) The research is intended to expand the pool of knowledge in the area of awareness as well as

give an insight on the fact that investment or trading can be driven by behavioral motives as

opposed to fundamental motives which will help conduct further studies through the provided

research findings.

(ii) The research will provide information that will be useful to the USE, government bodies,

institutions, potential listing companies & individuals in our society, and researchers. The

findings will form an information base for USE and policy makers on how to better performance

of stocks and increase stock participation.

1.8 Conceptual framework

Adopted from Luigi&Tullio (2005), Weber&Milliman (1997) and Alexander (2004)

Description of the model

In order to make proper investment decisions, investors require information and should be

knowledgeable about the various stocks being traded (stock market activities). Awareness can be

through social learning, financial information and from private sources. The level of awareness

Investor Awareness Financial awareness Social learning

Perceived Risk Attitudes Affect

Cognition

Investor behavior Psychological

sociological

Emotional

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by the investor will affect the individual risk attitudes of the investors and stock price predictions

hence affecting trading behaviour of stocks in the market.

According to Guiso and Japelli (2005), awareness of investors can be through learning from

issuers and distributors of information, and others often learn about investment opportunities

from peers who have been informed by financial intermediaries (Social learning). On the other

hand, awareness can be through financial awareness which is majorly determined by the

investor’s resources (income, financial wealth), age and education status. And the information an

individual holds determines their risk perception.

Finucane et al. (2000), asserts that if subjects were given information that risk is high, they were

expected to infer low benefit; if they were given information that risk is low, they were expected

to infer high benefit. And this makes perceived risk negatively correlated to self-esteem, rigidity

and risk taking hence affecting investor behaviour.

According to Huang (2003), human behavior is not only cognitive, but also emotional which

influences investor behaviour when trading. And the need to incorporate psychology attempts to

explain how perception of investors and their reaction to uncertainties affect the investment

decision there by influencing price movements of stocks.

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CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction The section presents a critical review of research work carried out by various scholars in the field

of investor awareness, perceived risk attitudes and stock market investor behaviour.

2.2 Investor Awareness

There are two types of investors, aware and unaware. Aware investors may know for example

the existence and characteristics of a risky asset (bonds and stocks) and have the same

information on the probability distribution of the stock return. The others are not aware of stocks.

Hence they can only invest in bonds, regardless of the entry costs. The shadow cost of ignorance

is the expected excess return.

In stock markets, information is usually transmitted from issuers to investors through several

different channels mainly through mandatory public disclosure by issuers, voluntary public or

private disclosure by issuers; and private acquisition by investors from sources other than the

issuer, such as purchasing research reports from stock analysts, examining the firm’s products or

services, and consulting the firm’s competitors among others (Zhen 2006).

In the case of small investors, information relied on is mainly from public disclosure, well as

professional investors use all channels. In particular, some professional investors are selected by

the issuer to receive material information, for example, through quarterly analyst conference

calls. Many issuers favor such selective disclosure for practical reasons, such as concealing

information from their competitors leading to an information gap within the financial market

(Zhen, 2006).

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Merton (1987) related portfolio incompleteness and heterogeneity to lack of information on

investment opportunities, calling attention to the indisputable fact that investors purchase only

securities they know about. Merton showed that even in the absence of monetary transaction

costs, portfolio choice depends on the awareness of the asset menu known to each investor.

Similarly, awareness of stocks is exogenous to the investor’s set choice (Guiso and Japelli,

2005). Therefore, the question as to what size and composition of the investor’s portfolio choice

depends on how aware an investor is. Like Merton (1987), Guiso and Japelli stress that issuers

and distributors of financial assets have strong incentives to inform the pool of potential

investors.

Besides learning from issuers and distributors, individuals often learn about investment

opportunities from peers who have been informed by financial intermediaries (Social learning)

and this often occurs depending on the specific process of social learning and on how people

interact. On the other hand, awareness can be through financial awareness which is majorly

determined by the investor’s resources (income, financial wealth), age and education status

(Guiso and Japelli, 2005).

2.2.1 Social Learning

Many investors learn from other individuals through social interaction, which is another channel

for spreading stock market information. Social interaction indeed increases the probability that

individuals become financially aware. However, depending on parameter values, intense social

interaction may induce asset suppliers to rely on word-of-mouth rather than direct information

production, thus saving on information dissemination costs. Grossman and Stiglitz (1980) and

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Verrecchia (1980) examined how information on asset returns affects portfolio choice. In these

models differences among investors are endogenous, and financial information reduces

subjective uncertainty on returns.

According to Merton (2007), individuals who were exposed to economics during their schooling

may be more likely to have friends (perhaps their classmates) that invest in the stock market.

Because of “peer effects” in investing, respondents exposed to these friends may themselves be

more likely to invest in the stock market. Several studies have documented that “peer effects”

can be pretty powerful determinants of portfolio choice (Hong, Kubik and Stein, 2004) and

Brown, Ivkovich, Smith and Weisbenner, 2007). The education level of peers does matter for

stock ownership. Those who have friends that have a college degree are more likely to own

stocks. Thus there may be information provision and learning via social interaction.

Newspaper readership has a positive impact on awareness, and its coefficient is always highly

significant. Increasing readership raises the probability of stock awareness, mutual funds, and

corporate bonds (Guiso and Jappelli, 2005). Awareness is strongly correlated with education,

year of birth, wealth, long term bank relations, newspaper readership and the index of social

learning.

2.2.2 Financial Awareness Learning from financial intermediaries is another way people become aware of investment

opportunities since financial illiteracy is widespread and individuals lack knowledge of even the

most basic economic principles (Lusardi and Mitchell (2006, 2007). Bernheim (1995, 1998) was

the first to point out not only that most households cannot perform very simple calculations and

lack basic financial knowledge, but also that the saving behavior of many households is

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dominated by crude rules of thumb. In more recent works, Bernheim, Garrett and Maki (2001)

and Bernheim and Garrett (2003) show that those who were exposed to financial education in

high school or in the workplace save more.

Similarly, Lusardi and Mitchell (2006, 2007) show that those who display low literacy are less

likely to plan for retirement as well as less likely to make investments and, as a result,

accumulate much less wealth. Agarwal, Driscoll, Gabaix and Laibson (2007) further show that

financial mistakes are prevalent among the young and elderly, who are those displaying the

lowest amount of financial knowledge.

2.2.2.1 The Determinants of Financial Awareness According to Guiso, Haliassos and Jappeli (2004), financial awareness has got three relevant

implications. First, issuers will target the individuals (or groups) that have a greater probability

of investing in the stock market. The benefits of spending on information are greater where, once

individuals are aware of investment opportunities, the chances of adoption are high. Second,

individuals are more likely to be aware where the cost of sending signals is lower, e.g. in areas

where the cost of contacting investors is relatively low. Third, awareness should be higher in

areas where the chance of learning from others is higher, because in those areas one can learn

from peers as well as from the general media and from intermediaries.

Guiso and Jappelli, (2005) incorporate wealth as a factor affecting awareness. If all investors are

aware of stocks, costs, those who don’t invest in stocks are simply those who are not aware that

stocks exist. Wealthier investors benefit more from financial information and are therefore better

informed. This assumes that investors are aware of all available assets but can acquire

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information, improving the precision of their subjective expectations of asset returns. However,

Guiso, Haliassos and Jappeli (2004) argue that potential investors cannot choose to become

aware. Issuers and distributors can broaden the investor base by disseminating information about

their stocks, by such means as mailings, advertising in the financial press or direct contacts with

potential investors. They further assert that wealth threshold increases with the fixed cost, risk

aversion and the variance of returns to stock. Other things being equal, people who are willing to

invest a large share of their wealth in stocks are more likely to enter the stock market because

they have more to lose from not taking advantage of the equity premium.

Education is strongly associated with awareness. According to Maarten, (2007), findings

revealed that stock ownership increases sharply with education levels. , and only a small fraction

of those with low education own stocks. Moreover, Guiso and Jappelli (2005) asserted that

having a university degree is associated with an increase of 17 percentage points in the

probability of being aware of stocks, and of 25 points for mutual funds, investment accounts and

corporate bonds. Having an economic degree further increases the probability of awareness of

mutual funds, investment accounts and corporate bonds by 13 to 21 points. Education and

financial resources tend to be positively correlated, while wealth and income vary in predictable

ways with age, (Luigi and Tullio, 2005). Education and wealth are also likely to be correlated

with social learning, because the wealthy and better educated are more likely to interact and learn

from others.

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2.3 Perceived Risk Attitudes Investing is clearly risky and people routinely have to make decisions under uncertainty due to

incomplete information. Depending on the amount of information an investor has regarding

various stocks on the stock market determines one’s risk perception.

The perceived degree of uncertainty by individuals affects their decisions regarding

consumption, saving and investing (Cary & Javier et al, 2008). Perceptions encompass

psychological and emotional aspects, which subsequently guide judgment and decision making.

And this makes perceived risk attitudes of investors to be more subjective rather than objective

to risky situations. Therefore, the attitudes we form and express are likely to be influenced both

by emotions and a more ‘‘logical’’ cognitive assessment (Breckler &Wiggins, 1989; Esses,

Haddock & Zanna, 1993; Millar & Tesser, 1989; Zanna &Rempel, 1988).

2.3.1 Affect Affect often refers to one’s emotions/ feelings. Research has shown that emotion can better be

defined by examples of emotional states. Elster (1960) defines emotion as a physiological state

of arousal triggered by beliefs about something. On the other hand, emotion can be seen as “the

felt tendency towards anything intuitively appraised as good (beneficial), or away from anything

intuitively appraised as bad (harmful)” (Arnold1960). However, Solomon (2000) addresses

emotions as a complex influence that combines cognitive, physiological, social, and behavioral

aspects of an individual.

Though on the contrary, emotions are addressed as evaluative rather than cognitive judgments

(Frijda 2000).Emotions are evaluative in that they evoke positive or negative valences about an

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object for example, being unhappy or happy or being pessimistic or optimistic (Bradley and

Lang 2000).

Despite the lack of a unified definition, there is some agreement on the set of emotions that exist.

According to Elster (1998), some states such as anger, hatred, guilt, regret, fear, pride, elation,

joy, and love are clearly emotions. According to Peter (2003), elements of emotion such as

feelings of control, dread, and knowledge imply risk always contains an emotional or affective

dimension. Survey evidence indicates that such emotional factors as control and dread figure

prominently in the perception of financial risks, and that emotional dimension such as dread are

important in the perceived risk of financial gambles.

2.3.1.1 The Affect Heuristic The ‘affect heuristic’ is a concept that looks at how people assess risks (Alhakami and Slovic,

1994; Peters and Slovic, 1996; Finucane et al., 2000; Slovic, 2000; Slovic et al., 2002).

The research on the affect heuristic/affect arose out of early research into why the public’s

perception of the risk of nuclear power differed so dramatically from the more objective

assessment of the risk of nuclear power held by experts on risk assessment. The main finding

was that the public feared the unknown risks associated with nuclear power.

Public’s perception of risk does not only differ in nuclear power but also in other activities such

as stock market activities.

Research has shown that there is consistency in the public’s deviations from objective risk

assessments and that affective/emotional reactions appear to drive both perceived benefit and

perceived risk (Alhakami and Slovic, 1994; Finucane et al., 2000). They found that if an activity

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for example a particular stock was ‘liked’, people tended to judge its risks as low and its benefits

as high and where the activity was ‘disliked’, the risk judgments were high and low benefit

which leads to a negative relationship between risk and return (Finucane et al.,2000). On the

stock market, investors tend to have a local bias where investments in local stocks are more

preferred than foreign stocks hence a low perceived risk for such stocks and higher likelihood for

investing in them.

Finucane et al. (2000), further attempted to manipulate affect in such a way as to lead people to

differentially perceive risks and were expected; if subjects were given information that risk is

high, they were expected to infer low benefit; if they were given information that risk is low,

they were expected to infer high benefit. And this makes perceived risk negatively correlated to

self-esteem, rigidity and risk taking but positively correlated to anxiety (Schaninger, 1976).

2.3.2 Cognition According to Lucy et al (2003), cognition refers to an individual’s belief towards an object. The

beliefs we form can either be positive or negative depending on aspects like, knowledge, moral,

intelligence, inspiration, dishonesty, and being weak among others (Lavine et al 1998).

The examination of cognitive aspects of financial behavior in isolation is troublesome and may

be misleading. Emotional reactions or evaluations occur at a very early stage and are more basic

than cognitive evaluations (Zajonc 1980; LeDoux 1996). Furthermore, theorists recognize that

emotion and cognition are interdependent, rather than competing, influences (Simon 1967).

Emotions are seen to be triggered by beliefs; hence, an investor regrets an investment decision

because she believes that bad outcomes could have been avoided.

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In the stock market, it appears that an investor is more concerned with the financial risk and the

opportunity risk than other risks. The financial risk is concerned with the outcome that will harm

the investor financially whereas the opportunity loss risk is the outcome that by buying stock A,

the investor will miss out on buying stock B he would really prefer buying. When an investor

makes an investment decision, the investor’s perception of these two risks can be a deciding

factor. If the investor is risk averse, he will take steps to minimise risk, for example, by

diversifying his/her investment in various stocks; if he/she is risk-taking, he/she will not tend to

diversify his portfolio, for example, he will invest in one stock, expecting to get a high return on

investment. Therefore, investors with various degree of perceived risk attitudes; perceived risk

averse, perceived risk neutral or perceived risk takers will behave differently.

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2.4 Investor Behaviour Human behaviour among others determines investors’ decision making on the stock markets.

According to Huang (2003), human behavior is not only cognitive, but also emotional moreover;

cognition and emotion are interrelated which influences investor behaviour when trading.

Investor behaviour on the stock market is often seen to be a factor of cognition, emotion and

social influences. And the need to incorporate psychology attempts to explain how perception of

investors and their reaction to uncertainties affect the investment decision there by influencing

price movements.

Alternative explanations advanced by various scholars, explain irrationality of investor

behaviour in financial markets as being driven by some sort of influence (Rabin, 1998). Naveed

et al (2011) argue that small/ individual investor decision making on the stock market is driven

by heuristics, prospect theory and regret aversion. This is seen to be based on psychology of

investors as well as emotional and social influences. On the other hand, investors are seen to be

generally irrational exhibiting a number of predictable and financially ruinous biases, often

attributed to psychological factors- fear, greed, and other emotional responses to price

fluctuations and dramatic changes in an investor’s wealth (Andrew et al, 2005). Hence, investors

succumb to behavioral biases when making investment decisions.

According to Shefrin (2002), biases can cause people to emphasize or discount information, or

can lead to too strong an attachment to an idea or an inability to recognize an opportunity.

Similarly, the context in which you see a decision, the mental frame you give it i.e., the kind of

decision you determine it to be can also inhibit your objective view hence leading to irrationality.

17

A bias as a driver of investor behaviour refers to a tendency or preference or belief that

interferes with objectivity, a predisposition to a view that inhibits objective thinking. Biases that

can affect investment decisions can be cognitive/psychological, emotional and social biases

(Hersh 2002).

2.4.1 Psychological biases Over confidence

One of the biases is overconfidence hypothesis which states that normally people have active

psychological bias about their abilities. They either overestimate their abilities or underestimate

other ability or difficulty of the task (Johnson and Fowler, 2009). So they are overconfident

about their abilities (Frank, 1935), accuracy of their possessed knowledge (Fischhoff, Slovic and

Lichtenstein, 1997; Lichtenstein, Fischhoff and Phillips, 1982) and either acquired information

or ability to interpret these information, that causes the investors to trade too much in the stock

market (Barber and Odean, 1999; Odean, 1999).

Good past performance may boost the future expectation of the investor there by instigating him

to be overconfident and that might lead to a complete disaster as DeBondt and Thaler (1985)

found that there is a tendency of past winners to face loss to become future losers and vice versa.

Similarly, Barber and Odean (2008) also confirm that individual investors prefer to buy attention

grabbing stock that is in news or that has experienced higher unexpected trading volume or

stocks which have provided some excessive one day returns and that behavior also signals

towards the good expectation relative to the past performance or publicity of that particular

stock.

18

Odean (1998) shows that overconfident investors trade more than rational investors and that

doing so lowers their average utilities, since overconfident investors trade too aggressively when

they receive information about the value of a security. While trading, men are generally seen to

be more overconfident than women (Lundeberg, Fox and Punccohar, 1994). Furthermore,

Barber and Odean (2001) show that men trade nearly one and a half times more actively than

women and thereby reduce their net returns more than women.

Overconfidence makes the informed investors exaggerate the precision of the private information

they have, and self-attribution leads them to decrease the weighting of public information when

they make a decision. In capital markets, overconfidence induces much more transactions and

decreases returns for individual investors (Barber and Odean (2000), Barber and Odean (2001),

Barber and Odean (2002), Gervais and Odean (2001)).

Representativeness

The practice of stereotyping asset performance or of assuming commonality of disparate assets

based on superficial, stereotypical traits. In investing, representativeness is a tendency to be more

optimistic about investments that have performed well lately and more pessimistic about

investments that have performed poorly (Shefrin 2002). An investor may stereotype the

immediate past performance of investments as “strong” or “weak.” This representation then

lets them ignore the statistical explanations at hand.

19

Decision makers in this instance tend to form decisions by makes it hard to think of them in any

other way or to analyze their potential. As a result, you may put too much emphasis on past

performance and not enough on future prospects.

Wickham (2003) explains that due to representative heuristics people fall into a decision bias that

encourage them to overestimate low probability events thus leading to wrong decisions

especially decision relating to investment in new ventures. Griffin and Tversky (1992) also found

that while deciding about the future investments, people are biased towards the strength of the

source and observing patterns that may not be relevant or even truly apparent (Brabazon, 2000).

They may assume that a recent trend in price movements will definitely continue into the future.

This may result in individual investors devoting too much attention to popular stocks that have

recently been performing well.

Statman (1999) explains that being duped into making investment decisions based upon this

imperfect theory of small numbers is something that the standard finance investor would never

do. Statman argues conversely that an investors regarding past performances of stocks as

evidence of future returns is a realistic possibility, contrary to the standard finance model of an

investor.

Anchoring

According to Shefrin (2002), anchoring is a bias in which the investor relies too heavily on

limited known factors or points of reference. This happens when you cannot integrate new

information into your thinking because you are too “anchored” to your existing views. You do

not give new information its due, especially if it contradicts your previous views. By devaluing

20

new information, you tend to under react to changes or news and become less likely to act, even

when it is in your interest. Such an investor is said to be conservative.

On the other hand, Shiller (2000) asserts that anchoring is a phenomenon in which, in the

absence of better information, investors assume current prices are about right. In a bull market,

for example, each new high is anchored by its closeness to the last record, and more distant

history increasingly becomes an irrelevance. People tend to give too much weight to recent

experience, extrapolating recent trends that are often at odds with long run averages and

probabilities (Shiller 2000).

Framing

Uncertainty is a common phenomenon which is encountered by almost every investor in the

stock market. For several decades, expected utility dominated as the sole explanation for the

behavior of people under uncertainty but after the work of Kahneman and Tversky (1979), a new

dimension; framing of decisions evolved.

In principle, framing can be broader or narrower. An investor applying a broad framing could

analyze gains and losses in total wealth level whereas the narrow framing is usually defined at

level of individual securities. And the vast majority of empirical studies implicitly assume

narrow framing (Petri 2007).

Individuals’ behaviour on the stock markets can be explained by the framing of decisions that

involves presenting identical data with a different emphasis, which shifts a decision maker’s

expectation of the outcome (Ku¨hberger, 1998). Decision makers also place their own frame on a

21

decision through instinctive perception of the costs and benefits of each outcome, and by self

framing.

An important aspect of the framing process is that people tend to perceive outcomes as gains and

losses, rather than as final states of wealth. Gains and losses are defined relative to some neutral

reference point. For example, when addressing investments in stocks the investor’s reference

point is the purchase price of stock (Grinblatt and Keloharju 2001). Although, it is possible that

an investor is affected by some additional reference points such as; the maximum stock prices in

the recent return history hence affecting investors’ trading decisions.

However, an investor’s frame of mind tends to be opposite at the end of the year for tax reasons.

Odean (1998) finds that the clients of a large U.S. brokerage house tend to realize losses mainly

toward the end of the year. Finnish investors also realize losses more than gains during the last

eight days of the year (Grinblatt and Keloharju 2001). Moreover, they tend to repurchase the

same stocks recently sold (Grinblatt and Keloharju 2004).

According to Thaler (1980), the framing theory provides for mental accounting as an additional

element when multiple investments are to be evaluated. Framing influences how you manage

making more than one decision simultaneously. If presented with multiple but separate choices,

most people tend to decide on each separately, mentally segregating each decision (Hersh 2002).

By framing choices as separate and unrelated, however, you may miss making the best decisions,

which may involve comparing or combining choices there by resulting into lack of

diversification or over diversification of the portfolio.

22

The essential idea is that decision-makers tend to sort different gambles into separate accounts,

and then assess each account by ignoring possible interactions. In the case of equity market

investments, an account is usually considered to be an individual stock. When an investor

purchases a stock he opens a mental account and closes it at the time of selling. An investor

holding more than one stock in his portfolio has multiple mental accounts open simultaneously.

Disposition effect

According to Barber and Odean (1999), disposition effect is the tendency of the investors to

realize the gains quickly while holding the loss yielding investments (Shefrin and Statman,

1985). Furthermore, Odean (1998) asserts that the tendency of investors to “sell winners too

early and ride losers too long” demonstrates the existence of the disposition effect.

Several studies document the disposition effect (Locke and Mann, 2000; Odean, 1998; Shapira

and Venezia, 2001; Wermers, 2003). First detected by Shefrin and Statman (1985) in the real

stock market setting, the disposition effect was later confirmed by Odean (1998) using more

extensive and sophisticated data from the individual clients of a major U.S. brokerage house. The

Finnish evidence on the disposition effect is provided by Grinblatt and Keloharju (2001), who

find that individual investors are more prone to the disposition effect than their institutional

counterparts. In addition, they find that the disposition effect is primarily driven by large losses.

Shapira and Venezia (2001) provide evidence of the Israeli professional investors behaving in

disposition fashion. Moreover, Frazzini (2006) documents the disposition effect among the U.S.

mutual funds.

23

A growing number of studies suggest that the disposition effect may affect volumes and prices of

stocks. Kaustia (2004) finds that trading volume increases when price surpasses the offer price.

According to Knez, Smith, and Williams (1985), we find that investors who trade more have a

lower disposition effect than investors who trade less. Moreover, recently, Frazzini (2006) has

proposed that the disposition effect induces under reaction to news, generating the post-earnings

announcement drift. The tendency towards the disposition effect may be further moderated by

loss aversion.

Loss Aversion

Weber and Camerer (1998) look at loss aversion as a notion that losses are weighted more than

equivalent gains. Moreover, Nofsinger (2002) describes loss aversion as a scenario where

greater utility is lost when losing a certain amount of money, then the utility that is gained when

obtaining the exact same amount. This circumstance can lead to sunk cost effects, where, instead

of considering only present and future gains and losses to an investment; past and non-

recoverable costs affect decision making (Nofsinger 2002). Here, investors may feel inclined to

engage in an inappropriate investment simply because their time, money or effort has already

been spent on it.

2.4.2 Social and Emotional influences Herding

It is intuitively recognised that in times of uncertainty and fear, many investors imitate the

actions of other investors whom they assume to have more reliable information about the market.

Herding is a product of the two opposing emotional forces of fear and greed (Landberg, 2003).

24

With regard to human emotions in trading, given a choice, human emotions would choose not to

have lost, rather than not to have gained. The pain from a realised loss supersedes that of the

regret of an unrealised gain. Greed, however, is linked to Pride which is a pleasurable feeling of

having made a right financial decision resulting in a gain. However, the pursuit of pleasure is not

as strong a force as the flight from pain, whether real or perceived.

To see how these human tendencies result in herding behaviour, imagine an individual investor

making a relatively uneducated decision about which stock to invest in. Further investors who

are also unsure about what stock to invest in, being adverse to regret (as discussed above) and

happy to go with majority rulings; decide to opt out of making the decision. Instead they attempt

to free ride the information that the first investor must have had. They and others after them

invest in the same stock as the original investor (Shiller, 2000). Herding can lead to ‘speculative

bubbles’ which historically have resulted in stock market crashes. Herding behaviour rapidly

pushes stock prices through the roof, usually far above the earnings worth of these popular

stocks.

Among individual investors, herding occurs when a group of investors intensively buys and sells

the same stock at the same time. However, for individual investors, the rational view may not be

applicable since most investors are anonymous. According to Christie and Huang (1995),

individuals are more likely to suppress their own beliefs in favor of the market consensus during

periods of unusual market movements, and herd behavior is most likely observed during periods

of market stress. Chang et al. (2000) suggested that such behavior may be due to a high degree of

government intervention, a low quality of information disclosure, or the presence of more

25

speculators with relatively short investment horizons. In a fearful crisis situation, very often there

is no time for reflection and herding is often a shortcut to a decision. A prolonged downturn is

likely to breed fear, which in turn triggers irrational behaviour causing individuals to resort to

panic selling in such times of crisis.

According to Persaud (2000), herding is seen to involve three main factors:

“First, in a world of uncertainty, the best way of exploiting the information of others is by

copying what they are doing.

Second, bankers and investors are often measured and rewarded by relative performance, so it

literally does not pay for a risk-averse player to stray too far from the pack.

Third, investors and bankers are more likely to be sacked for being wrong and alone than being

wrong and in company.”

Moreover, Mangion (2004) stresses that herd behaviour has frequently been highlighted in

financial markets and it shows that investors can be influenced by the actions of others.

According to him, investors may trade on noise as if it were information. This encourages

investors to trade more frequently than would otherwise be the case leading to extreme

outcomes, first on the upside and then on the downside as confidence turns to panic. In this case,

fundamentals are forgotten and markets become extremely ‘overbought’ or ‘oversold.

According to Welch (2000), the irrational view of herding focuses on individual investors,

where investors disregard their prior beliefs and blindly follow the actions of other investors. The

rational view, in contrast, focuses on the principal-agent problem in which managers mimic the

actions of others. Thus, managers may completely ignore their own private information in order

26

to maintain their reputational capital in the market (Froot et al. 1992; Scharfstein and Stein 1990;

and Trueman 1994).

Kelly and O’Grada (2000) asserts that trading volume provides important information where by

a large trading volume is a necessary condition for the existence of herding behavior among

investors since it is a voluntarily coordinated action. In order for market participants to herd and

ignore their own information, the volume signal has to be large enough to persuade investors that

other things might be happening. Consequently, investors may come to believe that it is in their

best interest to follow the crowd. In other words, herd behavior is more likely to occur following

high trading volumes in the previous period. By the same argument as in Christie and Huang

(1995), the cross-sectional dispersion should be negatively correlated with trading volume when

herding occurs. However, this is only a necessary condition. Information could also lead to a

high trading volume.

Over reaction and under reaction

When news regarding the various companies trading on the securities market is issued, investors

are at discretion to weigh the news in terms of importance leading them to either under react or

over react.

Investors could also exhibit over reaction or under reaction tendencies while trading. The under

reaction evidence studied by Cutler, Poterba, and Summers (1991) shows that over horizons of

perhaps one to twelve months, security prices under react to news. As a consequence, news is

incorporated only slowly into prices, which tend to exhibit positive autocorrelations over these

horizons. The overreaction evidence studied by Lakonishok, Shleifer, and Vishny (1994), shows

27

that over longer horizons of perhaps three to five years, security prices overreact to consistent

patterns of news pointing in the same direction making securities that have had a long record of

good news to become over-priced and have low average returns afterwards.

Regret Aversion

Regret aversion is about peoples’ emotional reaction to having made an error of judgment,

whether buying a stock that has gone down or not buying one they considered and that has

subsequently gone up. Investors may avoid selling stocks that have gone down in order to avoid

the regret of having made a bad investment and the embarrassment of reporting the loss. They

may also find it easier to follow the crowd and buy a popular stock: If it subsequently goes

down, it can be rationalized as everyone else owned it (Thaler 1993).

Sevil, Sen and Yalama (2007) assert that investors experience regret when they feel that their

past decisions were wrong and try to avoid the pain arising out of the poor decision. And in order

to avoid the regret of pain, people should try to justify their bad investment decisions by putting

responsibility on some other reference point. In order to averse the regret, the investor may also

be willing to pay certain amount as guarantee for a risky portfolio (Muermann, Mitchell and

Volkman, 2005). Moreover, Gollier and Salanie (2006) proposed that regret may change the

optimal portfolio selection of the regret sensitive investor in a way that favors the assets which

have performed well particularly when the probability for such performance was low.

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2.5 Investor Awareness and Perceived Risk Attitudes What people perceive is influenced by how they select information to process. People are

incapable of absorbing all information, and are therefore selective as to what information

receives their conscious attention hence determining their level of awareness.

Each person will interpret information differently and their interpretations of information are

influenced by factors such as their knowledge, and their feelings and attitudes among others.

Although, some information may be disregarded if it is inconsistent with the perceived "story,"

what one person perceives can differ from what another person perceives, even though the

information is the same (Litterer 1965; Ricciardi 2008). People are prone to accept information

from unreliable sources if such information is believable and consistent with their existing

perceptions of events (Evans and Curtis-Holmes, 2005).

A number of studies have indicated that attitude to stock market risk depends upon the recent

behaviour of the stock market (Clarke and Statman 1998; Shefrin 2000; MacKillop 2003; Grable,

Lytton and O'Neill 2004; Yao, Hanna and Lindamood 2004). An alternative perspective on that

evidence can be derived from research by Weber and Milliman (1997) who suggested that risk

preference may be stable and that the effect of situational factors, such as stock market

performance, may be caused by changes in perceptions of risk. They further found that

influences on investment choices simultaneously affected risk perceptions. It could be the case

that attitude to perceived risk is constant, and that what changes is the perception of risk.

From the perspective of providing financial advice, this implies that by correcting

misperceptions about the risks of investments, a financial adviser can have a positive influence

29

on investment decisions. A financial adviser might note that the provision of some information

about an investment is likely to reduce a client's perception of risk. However, the provision of

too much information could cause confusion and procrastination. Information overload inhibits

decision-making. Also, the familiarity bias suggests that information that is not understood is

likely to deter a client hence increasing the perceived risk causing reluctance in buying stocks of

companies they are unfamiliar with.

Among non-experts, risk is perceived as greater if the person lacks information about, or control

over, outcomes. Lack of information and control in regard to investment outcomes leads to

mistrust of providers of financial services and mistrust of financial advisers (Sjoberg, 2001).

Therefore, the investor’s perceived risk attitude is negatively related to the level of awareness;

the more knowledgeable and informed an investor is, the lower the perceived risk attitudes and

vice versa for low levels of awareness.

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2.6 Perceived Risk Attitudes and Investor Behaviour Attitude towards perceived risk affects consumer behavior for instance, in decision making

situations like stock market investment. The way an investor behaves on the financial (stock)

market depicts his perceived risk attitudes about the available stocks hence affecting the trading

of stocks and investor portfolio selection.

Cognitive biases are seen to can cause an exaggerated perception of risk. Narrow framing entails

focus on short-term investment performance when the investment is long-term. An example is

the person who is concerned about quarterly stock returns when the stock is perpetual. Short

investment horizons are much more likely to show losses than long horizons. A short-term focus

can cause an exaggerated view of the probability of losses, and hence an increased risk

perception.

Damasio (1994); LeDoux (1996), indicate that emotion improves decision making in two

respects. First, emotion pushes individuals to make some decision when making a decision is

paramount. In some situations in life, so many options exist that an individual could devote

excessive amounts of time to the decision-making process. An individual could simply become

overwhelmed by the possibilities. Emotion provides a coping mechanism and allows individuals

to focus without being caught up in the details.

Second, emotion can assist in making optimal decisions. A vast psychological literature shows

that emotional state can significantly affect decision making (Elster 1998; Hermalin and Isen

2000).

While strong emotional responses are often associated with poor decisions (particularly those of

a financial nature), recent research in psychology indicates that the absence of emotions can also

31

lead to suboptimal decisions. Emotion helps to optimize over the cost of optimization. Even mild

emotional states can affect behavior (Isen 2000). Positive feelings can make it easier to access

information in the brain, promote creativity, improve problem solving, enhance negotiation, and

build efficient and thorough decision making. Emotion facilitates optimal-choice behavior when

a person is provided with several courses of action (Rolls 1999).

However, little attention has been paid to the direct role of emotion on choices of a financial

nature. Recently, Lo and Repin (2001) studied the physiological characteristics of professional

securities traders while they are engaged in live trading. They report significant correlation

between market events and physiological characteristics. They conclude that emotion is an

important determinant of a trader’s ability to survive in financial markets. Other recent research

has focused on the role of emotion in a more indirect fashion. Specifically, anomalous financial

behavior is frequently attributed to emotion.

A person’s current emotional state may influence financial decision making. For example, an

individual in a good mood because of recent experience or current position in life brings this

positive outlook to the task at hand. Ashbury, Isen, and Turken (1999) argue that a positive mood

enhances individual performance on many cognitive tasks. A large body of literature supports the

theory that positive mood allows individuals to better organize and assimilate information and

facilitates creative problem solving without affecting their knowledge, attention, and memory

among others.

When an individual becomes elated, perhaps because of good weather, he or she might become

more willing to buy stock at higher prices. Although literature does not provide compelling

32

evidence that optimism leads to lower risk aversion or that depression or a poor mood leads to

increased risk aversion.

According to Thaler and Johnson (1990), it is extremely difficult to make generalizations about

preferences toward risk. They conclude that after a series of winning gambles, individuals are

willing to take on more risk so that risk aversion declines after prior gains. However, after an

initial loss, participants become more risk averse. Other research shows that happy people are

more optimistic and assign higher probabilities to positive events (Wright and Bower 1992).

However, such investors are more risk averse. People in a good mood are less likely to gamble

because they do not want to jeopardize their good mood. Thus, it is not clear how positive and

negative emotional states affect risk preferences and, in turn, translate into market pricing.

As with the evidence on the effect of mood on risk choices, experimental evidence concerning

the relationship between risk tolerance and depression fails to provide a clear picture. Some

researchers question the importance of anxiety and depression in explaining choices across risky

alternatives (Hockey et al. 2000). Others conclude that risk aversion is correlated with depressive

tendencies (Eisenberg, Baron, and Seligman 1998). Importantly, as these authors recognize, risk

aversion is correlated with anxiety and depression. Eisenberg, Baron, and Seligman report that

the correlation between depressive symptoms and risk aversion arises from the correlation with

anxiety.

Over confident investors tend to be more aggressive when trading than rational traders due to the

much belief (trust) they have in their abilities and knowledge about the stock markets. Under

33

such circumstances, investors will have a low risk perception trading such company stocks hence

high trading levels of such stocks.

And according to the prospect theory, risk attitudes change depending on whether a prospect is

perceived as a gain or a loss relative to a reference level.

34

2.7 Investor Awareness, Perceived Risk Attitudes and Investor Behaviour With regards to the level of awareness and knowledge of alternatives available on the market in

making an investment choice and in decision making, investor expertise and experience is of

crucial importance (Alba and Hutchison, 1987; Lim, 1999). Investors with expertise have a

higher level of awareness relative to novices (Bettman and Park, 1980; Lim, 1999). In addition,

experts scored better in evaluating the offerings of various competitors (Bendapudi and Berry,

1997; Lim, 1999). The amount of experience investors have accumulated will affect their

decision-making capabilities and expectations about their broker. Investor’s past experience in

stock trading is also relevant in shaping predictions and desires (Smith and Swinyard, 1983).

The better the expertise and knowledge an investor has, the lower the risk perception and the

higher the levels of trading. On the other hand, in analysing the perceived risk attitudes of

investors, there is need to attempt to predict future movements on the stock market when

important news about companies listed on the market are issued hence affecting the buy/sell

decision of the investor (Alexander,2004).

Diacon and Hasseldine (2007) found that clients were more likely to invest when shown

presentations of performance over long periods due to a lower risk perception than when they

were presented with a succession of short-period returns. Although more information is

frequently thought to be beneficial, a financial adviser might benefit a client by making

performance information infrequent. Yet, when making decisions, people tend to be influenced

by what can be readily remembered. Vivid, much- highly publicized events such as stock market

crashes that are easily recalled produce an exaggerated perception of risk compared to long

periods of steady market advance which are less vivid and less publicized. The result is that

35

people over-emphasize crashes and exaggerate risk causing investors less likely to trade in

stocks. However, an adviser can provide more balanced information in order to overcome

negative perceptions arising from the availability bias.

36

CHAPTER THREE

METHODOLOGY

3.1 Introduction The section looked at the research design, the population of study, sample size, sources of data,

data collection methods, measurement of variables, the validity and reliability test, data analysis

and anticipated limitations of the study.

3.2 Research Design The study used a cross sectional quantitative research design. It involved descriptive and

analytical research designs to establish whether changes in the independent variable affect the

dependent variable.

The design was used because data about variables can be obtained once in a given time period. A

correlation approach using quantitative data was used to establish the relationship between

investor awareness, perceived risk attitudes and investor behaviour. And a regression model was

adopted to establish how the independent variable predicts the dependent variable.

3.3 Study Population The study comprised both staff of brokerage firms on the USE and individual investors trading

with the brokerage firms. The population distribution according to the licensed brokerage firms

(8) on the USE are: Dyer& Blair (U) Ltd (15 investors), African Alliance (U) Ltd (20 Investors),

Crane Financial Services Ltd (5 investors), Baroda Capital Markets Ltd (10 investors),

Renaissance Capital Ltd (14 investors), Equity Stock Brokers (U) Ltd (15 investors), and UAP

37

Financial Services (13 investors), Crested Stocks & Securities (18 investors). The total

population was 110 investors and technical staff.

3.4 Sampling Design and Sample Size The sample size of 86 was determined using Krejcie and Morgan (1970) table scale. To select

the sample, staff of brokerage firms and individual trading accounts with the brokerage firms

was chosen proportionately from each of the 8 brokerage firms.

Table 3.1: showing the sample size selection

Firm Population Sample Crested Stocks & Securities 18 10 Dyer & Blair (U) Ltd 15 8 African Alliance (U) Ltd 20 12 Crane Financial Services Ltd 10 18 Baroda Capital Markets Ltd 10 18 Renaissance Capital Ltd 14 7 Equity Stock Brokers (U) Ltd 15 8 UAP Financial Services 13 7 Total 110 86

3.5 Data Sources

Primary Data

Data was got from holding interviews with the brokers and individual investors in the brokerage

firms and through issue of semi-structured questionnaires to the brokerage firms and investors on

the USE.

Secondary Data

Journals, USE Annual Reports, news papers and reports from the brokerage firms were used.

Data regarding the trading of equities of companies from the licensed brokerage firms on the

USE was used alongside documentation from previous studies.

38

3.6 Data Collection Instruments Questionnaire

Primary data was collected using a questionnaire which was made up of closed ended questions

that were initially developed and pilot tested to ensure validity and reliability of the measurement

scales.

The questionnaire which is presented in Appendix 1 was directed to investors. A total of 100

questionnaires were sent out to the respondents and 45 responses were received from the

investors.

Data was collected from the brokers who trade stocks on behalf of investors (middle men) as

well as the individual investors trading with the brokerage firms.

3.7 Measurement of Variables All item scales for the variables were derived from previous studies where they had been tested

for validity and reliability.

Investor awareness was measured using a scale adapted from Ekambaram et al (2003). A 5 point

Likert scale ranging from strongly disagrees to strongly agree was used.

The perceived risk attitudes of the investors was measured using a point bi-serial correlation

adapted from Weber and Milliman (1997) between investor’s risk judgment about the company

and his choice and a psychometric approach based on likert statements that produced a one-

dimensional risk attitude scale.

Investor behaviour was measured using State Street’s approach which measures confidence

directly and quantitatively by assessing the changes in investor holdings of risky assets, herding,

over and under reaction and loss aversion of investors. This was based on likert statements

ranging from strongly disagree to strongly agree.

39

3.8 Validity and Reliability Test A pre-test of the research instruments to establish the validity was done. To determine the

internal consistency or reliability of investor awareness and perceived risk attitudes, Cronbach

Alpha Co-efficient was used as an index of reliability (Cronbach, 1951). A questionnaire was

then given to the individuals to give their opinion regarding its relevancy using a 5- point Likert

scale as shown below.

Reliability and Validity Index

Anchor Cronbach Alpha value

Content Validity Index

Investor Awareness 5 Point .813 .800 Perceived Risk Attitudes 5 Point .765 .643 Investor Behaviour 5 Point .630 .800 Reliability and validity values which are indicated by the Cronbach Alpha and Content Validity

Index respectively were observed to be above 0.6 for all variables. This indicates the scale was

both reliable and valid.

3.9 Data Analysis

The data was processed through tabulated frequency distributions using the SPSS programme. A

correlation statistical technique was then used to test and establish the strength of the relationship

between the variables. A regression model was used to examine the percentage of variance of

the dependent variable explained by the independent variables for prediction purposes.

40

3.10 Anticipated Limitations

The study concerns a sensitive area regarding investors and brokerage firms’ trading

which causes suspicions hence some vital information may be concealed due to lack of

trust.

The methodology was be limited due to the fact that measurement of variables using

scales may be subject to modifications since the scales were tailored to developed

economies where the stock markets are more developed than our USE.

There is a possibility of getting varying/ poor responses depending on the respondent’s

level of conceptualization.

41

CHAPTER FOUR

RESULTS AND FINDINGS OF THE STUDY

4.1 Introduction This chapter contains the presentation of results and interpretation of the findings in relation to

objectives of the study which were;

To determine the relationship between the investor awareness and perceived risk attitudes

about the USE

To examine the relationship between the perceived risk attitudes and investor behaviour

on the USE

To establish the extent to which the investor awareness, perceived risk attitudes affect

investor behaviour

4.2 Sample Characteristics This showed the characteristics of the respondents with regard to the response rate, age group,

gender, education level, and monthly income, period of trading on the USE, the stocks being

traded, the trading brokerage firm and the frequency of trading on the USE. The results showed

the following;

4.2.1 Response Rate Forty five (45) fully filled questionnaires out of the 100 questionnaires distributed were received

from brokers of the brokerage firms and individual investors. This represented a 45% response

rate.

4.2.2 Age Group of Respondents Respondents were categorized by age group and the results in the table indicated the following

on age group of the respondents.

42

Table 4.1: showing age group of Respondents

Frequency Valid Percent Cumulative Percent

Valid

18 - 27 yrs 11 24.4 24.4 28 - 36 yrs 26 57.8 82.2 37 - 46 yrs 8 17.8 100.0 Total 45 100.0

The results in the table 4.1 indicated that the majority (57.8%) are in the 28 – 36 year age bracket

while only 17.8% are in the 37 – 46 year age bracket. Only 24.4% were in the 18 – 27 year age

bracket. The findings on the age of respondents indicated that age being a determinant of

awareness showed that investors with age of 28 years and above were seen to be more aware of

stock market activities.

4.2.3 Gender of the Respondents The findings on categorization of respondents in terms of gender were as follows as indicated in

the table below.

Table 4.2: showing gender of respondents Frequency Valid Percent Cumulative Percent

Valid Male 29 64.4 64.4 Female 16 35.6 100.0 Total 45 100.0

From table 4.2 above, the sample was dominated by males (64.4%) while on the other hand; the

females comprised 35.6% of the sample. this implies that trading was dominated by the male

who were seen to be more confident when trading on the USE than their female counterparts.

4.2.4 Highest Level of Education The results on the highest level of education attained by the respondents indicated the following

as shown in the table below.

43

Table 4.3: showing Highest Level of Education attained by respondents

Frequency Valid Percent Cumulative Percent

Valid

Primary 1 2.2 2.2 Secondary 3 6.7 8.9 Certificate & Diploma 9 20.0 28.9 Degree & Above 32 71.1 100.0 Total 45 100.0

The results in table 4.3 showed that respondents with a degree & above dominated the sample

(71.1%) while Certificate & Diploma, Secondary and Primary holders represented 20.0%, 6.7%

and 2.2% of the sample respectively. This implies that with a higher education level, investors

are seen to be more likely aware of the stock market activities; its costs and benefits hence

attracting more individuals to trade.

4.2.5 The stocks traded in by Respondents Findings on the stocks traded on the USE by the respondents indicated the following;

Table 4.4: showing the stocks being traded by Respondents Valid Percent Cumulative Percent

Valid

Bank of Baroda share 3.45 3.45 British American Tobacco share 6.90 10.34 Centum investment co. ltd share 3.45 13.79 DFCU Bank share 11.49 25.29 EABL share 3.45 28.74 Equity Bank share 8.05 36.78 Jubilee holdings share 2.30 39.08 KCB share 6.90 45.98 Kenya Airways share 2.30 48.28 Nation Media Group share 2.30 50.57 National Insurance Corporation share 4.60 55.17 New Vision share 12.64 67.82

44

Stanbic Bank share 22.99 90.80 Uganda Clays Share 9.20 100.00 Total 100.0

The results in table 4.4 above indicated that the sample was dominated by the Stanbic Bank

Share (22.99%) followed by New Vision Share (12.64%), DFCU Share (11.49%) while on

average, the trading of Uganda Clays Share stood at 9.2%, Equity Bank Share at 8.05%, KCB

Share at 6.9%, and BAT (U) Share at 6.9%. The shares that were least traded were NIC Share

(4.6%), Bank of Baroda Share (3.45%), EABL Share (3.45%), Centum Investment Co. Share

(3.45%), Jubilee Holdings Share (2.30%), Kenya Airways Share (2.30%) and Nation media

share (2.30%).

This implies that majority of the sample invested more in local company shares (local bias)

compared to the foreign company shares.

4.2.6 The Brokerage firm trading with Findings in the table indicated which brokerage firm respondents traded with

Table 4.5: Showing the Brokerage firm respondents traded with

Valid Percent

Cumulative Percent

Valid

Dyer & Blair 32.69 32.69 African Alliance 26.92 59.62 Baroda Capital Markets 1.92 61.54 Renaissance Capital 13.46 75.00 Crested Stocks Financial Services 5.77 80.77 Equity Stock Brokers 15.38 96.15 UAP Financial Services 3.85 100.00 Total 100.00

45

The results in the table above indicated that the majority (32.69%) traded with Dyer & Blair,

followed by African Alliance (26.92%), while 15.38% traded with Equity Stock Brokers,

13.46% with Renaissance Capital, 5.77% dealt with Crested Stocks Financial Services, 3.85%

traded with UAP Financial Services and only 1.92% traded with Baroda Capital Markets.

4.2.7 How often do you trade on the USE? The results in the table indicated the frequency of respondents’ trading on the USE

Table 4.6: showing the frequency of respondents’ trading on the USE

Frequency Valid Percent Cumulative Percent

Valid

Weekly 3 6.7 6.7 Monthly 4 8.9 15.6 Quarterly 11 24.4 40.0 Semi- Annually 6 13.3 53.3 Annually 21 46.7 100.0 Total 45 100.0

The results in the table 4.6 indicated that the majority (46.7%) traded on the USE yearly while

24.4% traded quarterly, 13.3% traded twice a year. Only 8.9% traded monthly and 6.7% traded

on a weekly basis. This implies that the stock market is dominated by passive investors who

often trade annually with hardly any active investors.

46

4.3 Factor Analysis Results This section presented factor analysis on investor awareness and perceived risk attitudes. Factor

analysis helped the researcher to understand the composition of both variables and the relevancy

of the factors in each variable.

4.3.1 Investor Awareness Factor Analysis Results helped the researcher to understand the composition of Investor

awareness.

Factor Analysis: Investor Awareness

Soci

al

Lear

ning

Fina

ncia

l A

war

enes

s

I usually follow the stock market through Financial news on TV at least twice a week .661 I usually follow the stock market through financial news papers every week .837 I easily access the latest reports, prospectus and financial statements of any company on the USE annually

.684

I usually attend seminars, conferences& workshops hosted by the USE at least 3 times a year

.883

When seeking financial advice, I deal with licensed brokers, intermediaries or financial services companies

.757

I am somewhat knowledgeable of stock market activities on the USE .824 I clearly understand the role of brokerage firms in listing on the USE .763 The USE gives reports on corporate developments of various companies listed on a timely basis .764

I always have trust when trading on the USE .787 Eigen Value 3.487 1.285 Variance % 49.815 18.355 Cumulative % 49.815 68.170

47

4.3.1.1 Social Learning The researcher found that this component of Investor Awareness constituted 49.815% of the

Investor Awareness variable. Most important elements under this component included; One’s

willingness to continuously follow the stock market through financial news on TV at least twice

a week (.661), and following the stock market through financial news papers every week (.837);

one’s ability to access a company’s latest reports, prospectus and financial statements on the

USE annually (.684), and the willingness to attend USE seminars, workshops, conferences at

least thrice a year (.883)

4.3.1.2 Financial Awareness Findings showed that this component of Investor Awareness constituted 18.355%of the Investor

Awareness variable. Most importantly was one’s knowledge of the stock market activities on the

USE (.824), and the trust one has when trading on the USE (.787). Dealing with licensed

brokers, intermediaries or financial services companies when seeking financial advice (.757) and

one’s ability to clearly understand the role of brokerage firms in listing on the USE (.763). And

the timely release of reports on corporate developments of various companies listed by the USE

(.764).

This implies that most investors on the stock market rely more on information from social

learning and peers.

48

4.3.2 Factor Analysis for Perceived Risk Attitudes Factor Analysis Results helped the researcher to understand the composition of Perceived Risk

Attitudes

4.3.2.1 Affective This component constituted 49.377% of the Perceived Risk Attitude variable. Most important

elements under this component included an individual’s fear to invest in stocks that showed a

sure gain (.849), one’s worry of investing in stocks that exhibited past negative performance in

trading (.858), the comfort of trading in stocks that have shown a past positive performance

(.549), how cautious one is with stocks that showed sudden changes in price (.860), and the

Factor Analysis: Perceived Risk A

ffect

ive

Cog

nitiv

e

I usually have a fear to invest in stocks that have a sure gain .849 I am cautious about stocks which show sudden changes in price or trading activity .860 I usually have worry investing in stocks that have had a past negative performance in trading .858

I am always attracted to investing in stocks .579 I feel that the idea of participating in a buy/sell on the stock market is appealing .830 I am usually at ease with the stock trading system on the USE .779 I am often not afraid to invest in stocks that have shown a past positive performance in trading .549

My investment in stocks is largely based on investment knowledge, experiences and education .536

I usually consider the credibility of brokerage firms that provide the financial services .897

I can easily ascertain the expertise of the brokers offering service .651 It is always easy to determine the credibility of the stock market .600 I can easily tell the reputation of brokerage firms staffing service .718 I am hopeful when undertaking investment in stocks that have exhibited a sure loss .789 Eigen Value 3.4565 1.397 Variance % 49.377 19.952 Cumulative % 49.377 69.329

49

willingness to invest in stocks on the USE (.579); how appealing it is for one to participate in

stock trading (.830), and the ease one has with the stock trading system on the USE (.779)

4.3.2.2 Cognitive This component accounted for 19.952% of the Perceived Risk Attitude variable. Most emphasis

lay on how an investor’s investment knowledge, experience and education affect investment

(.536), the credibility of brokerage firms that provide financial services (.897), the reputation of

brokerage firms staffing service (.718), the expertise of brokers offering service (.651), the

credibility of the stock market (.600), and the hope of investing in stocks that have exhibited a

sure loss (.789).

Findings showed that affect is the major determinant of investor perceived risk attitudes

compared to cognition.

50

4.4 Relationship between the variables The section presented findings on the correlation between Investor Awareness, Perceived Risk

Attitudes, and Investor Behaviour.

The results in the table below indicated the results for the correlations between Investor

Awareness, Perceived Risk Attitudes, and Investor Behaviour

Social learning

Financial Awareness

Investor Awareness

Perceived Risk Attitudes

Investor Behaviour

Social learning 1.000 Financial Awareness .587** 1.000 Investor Awareness .619** .559** 1.000 Perceived Risk Attitudes -.466** -.302* -.594** 1.000 Investor Behaviour .419** .572** .555** -.389** 1.000 ** Correlation is significant at the 0.01 level (2-tailed). * Correlation is significant at the 0.05 level (2-tailed).

4.4.1 The Investor Awareness and Perceived Risk Attitudes about the USE The results in the table indicated that the Investor Awareness and Perceived Risk Attitudes are

negatively related (r = -.594**, p <.01). Results in this case indicate that as Investors gain

knowledge and Information about the stock market activities, their perceived risk will gradually

decrease and they will be more likely to invest in that particular stock.

4.4.2 The Perceived Risk Attitudes and Investor Behaviour on the USE The Perceived Risk Attitudes and Investor Behaviour are negatively related (r = -.389**, p<.01).

This implies that if investors exhibit worry, fear and are cautious (high risk perceived) when

making an investment decision on the stock market, it will lead to a negative mood resulting into

pessimistic behaviour; for example, one may be less confident when trading in a particular

51

company stock. On the other hand, an optimistic investor exhibits low risk perception therefore,

likely to invest more (over confident).

52

4.5 The Investor Awareness, Perceived Risk attitudes affect Investor Behaviour The section presented the findings on regression analysis. A regression model was used to show

the level to which investor awareness and perceived risk attitudes can predict investor behaviour

4.5.1 Regression Model for the components of Investor Awareness and perceived risk attitudes with stock market Investor Behaviour as the dependent Variable Results for determining the overall effect of the components of investor awareness and perceived

risk attitudes on stock market investor behaviour can be seen in the table below

Unstandardized Coefficients

Standardized Coefficients t Sig.

Model B Std. Error Beta (Constant) 1.759 .823 2.138 .039 Social learning .079 .143 .101 .555 .582 Financial Awareness .519 .157 .535 3.304 .002 Affective .156 .248 .105 .629 .533 Cognitive .201 .226 .144 .888 .380 Dependent Variable: Investor Behaviour R Square .349 Adjusted R Square .283 F Statistic 5.238 Sig. .002 Results indicated that social learning, financial awareness, affective and the cognitive component

can explain 28.3% of the variance in the stock market investor behaviour (Adjusted R Square =

.283). Financial Awareness was the only variable that had a level of significance less than .05

and the rest of the components all had their levels of significance above .05. Overall, the

regression model was significant at the 95% confidence interval level.

53

4.5.2 Regression Model The regression model in the table below indicated the level to which investor awareness and

perceived risk attitudes can predict stock market investor behaviour.

Model Unstandardised

Coefficients Standardized Coefficients t Sig. Dependent Variable:

Investor Behaviour B Std. Error Beta R Square .314

(Constant) 2.144 .524 4.095 .000 Adjusted R Square .281 Investor Awareness .451 .145 .502 3.120 .003 F Change 9.396 Perceived Risk Attitudes .087 .154 .091 .566 .575 Sig. .000

The regression model above revealed an acceptable fit of adjusted R Square (.281). Adjusted R

Square (.281) indicates that investor awareness, perceived risk attitudes can predict investor

behaviour by (Adjusted R Square = .281). Investor awareness (Beta = .502) is a better

determinant of investor behaviour than the perceived risk attitudes (Beta =.091). The implication

is that the level of awareness, that is, the knowledge and information one has on a particular

company stock/ about the stock market, greatly affects the investor behaviour than the perceived

risk attitudes. The more knowledgeable one is, the more likely one is to invest.

54

CHAPTER FIVE

DISCUSSION, CONCLUSIONS AND RECOMMENDATIONS

5.1Introduction This chapter presents discussion of findings observed and inferred from the data provided in

chapter four. The discussion presents information about the variables, their comparison, and the

results in relation to the research objectives.

5.2 Discussion of findings The section presents a discussion of findings, conclusions and recommendations of the study in

line with the research objectives

5.2.1 The relationship between Investor Awareness and Perceived Risk Attitudes on the USE

Findings showed that Investor Awareness and perceived risk attitudes were negatively

correlated. Findings were in support with Weber and Milliman (1997) and Sjoberg (2001)

argument where it was argued that, the more financial information one has, the lower the

perception of risk of investing in such a stock and the higher the likelihood for investing more in

a particular stock.

5.2.2 The relationship between Perceived Risk Attitudes and Investor Behaviour on the USE

The results of the findings indicated that there was a negative correlation between perceived risk

attitudes and investor behaviour on the USE; the higher the risk perception, the lower the

likelihood of investing in a particular stock and the lower the risk perception, the higher the

likelihood of trading more.

55

As argued by Eisenberg, Baron, and Seligman (1998), where investors with extreme emotions

(anxiety and depression) are seen to have high risk perceptions and tend to be risk averse there

by reducing their possibility to invest in a give stock while when investors are over confident

with their abilities/information about a particular stock, they attach a low risk perception hence

trading more in such a stock. Though contrary to Schaninger (1976)’s assertion to where

perceived risk negatively correlated to self-esteem, rigidity and risk taking but positively

correlated to anxiety.

5.2.3 The extent to which Investor Awareness, Perceived Risk Attitudes affect Investor behaviour on the USE Findings showed that both investor awareness and perceived risk attitudes had an impact on

investor behaviour: Despite, awareness being a better determinant of stock market investor

behaviour than the perceived risk attitudes, financial awareness was not a significant determinant

of stock market investor behaviour.

The findings were in line with Littere (1965): Ricciardi (2008) where interpretations of

information by investors about the stock market is seen to differ and can be influenced by factors

such as their knowledge, and their feelings/ attitudes among others. However, to some investors

the information may be disregarded if it is inconsistent with the perceived "story." What one

person perceives can differ from what another person perceives, even though the information is

the same (Litterer 1965; Ricciardi 2008). And this makes investor awareness a more realistic

determinant of investor behaviour compared to subjective evaluations of perceived risk attitudes.

56

5.3 Conclusions On the stock market, investors tend to have a local bias where investments in local stocks are

more preferred than foreign stocks hence a low perceived risk for such stocks and higher

likelihood for investing in those stocks.

Research has shown that investors are more likely to invest in stocks where performance is over

long periods due to a lower risk perception than when presented with a succession of short-

period returns. And when making decisions, people tend to be influenced by what can be readily

remembered; much- highly publicized events such as stock market crashes.

Investor behaviour on the stock market is seen to be driven by irrational influences. Investor

behaviour on the stock market is often seen to be a factor of cognition, emotion and social

influences. And the incorporation of psychology attempts to explain how perception of investors

and their reaction to uncertainties affect the investment decision.

57

5.4 Recommendations There should be improvement in the awareness of stock market activities in Uganda. Individuals

should be made financially aware and taught about the stock market activities and its role. This

calls for holding more awareness programs which should evenly be distributed to all districts

rather than centralized.

In order to make trading on the stock market un biased, investors should be enlightened on the

various listed companies and the products they are trading. This calls for better financial

awareness through having more credible financial intermediaries hence reducing on the

predictive skills of investors leading to a more rational market.

There is need for financial intermediaries like brokers to incorporate both technical and

fundamental analysis when analyzing stock performance, that is, both past and future market

movements should be incorporated in stock prices. And this will help them provide a more

realistic judgment when a buy/sell of a particular stock should be made.

There is need to build trust on the stock market. Firms trading on the stock market should be

urged by the Capital Market Authority (CMA) to put in place good corporate governance

principles and be accountable to the public. This will help listed firms to improve their

performance as well as attract more investors on the USE.

58

5.5 Areas for further research

The research concentrated on investor awareness, perceived risk attitudes as factors determining

investor behaviour on the USE. However, the study recognizes that there are other areas which

need to be explored in explaining the investor behaviour on the USE. The following areas are

recommended for further research

Trust and investor participation on the USE

Investor perception of information disclosed in financial reports and investor behaviour

The role of affect in investor decision making

59

REFERENCES

Brian M. Lucey and Michael Dowling (2005), The Role of Feelings in Investor Decision making,

Journal of Economic Surveys, Vol. 19, No.2 Blackwell Publishing Ltd

Glasman, L.R and Albarracin, D (2006), Forming Attitudes that predict future behaviour: a

meta-analysis of the attitude behaviour relation, Psychological Bulletin, Vol.132, No.5,

pp. 778-822

Brennan, M.J. (1995), The Individual Investor, The Journal of Financial Research, Vol.XVIII,

No.1 pp 59-74

Kahneman, D. and Riepe M.W (1998), Aspects of Investor Psychology, Journal of Portfolio

Management, Vol.24 No.4, pp 52-66

Brigitte Funfgeld and Mei Wang (2008), Attitudes and Behaviour in everyday Finance: evidence

from Switzerland, International Journal of Business Management, Vol.27, No.2, pp 108-

124

Richard Deaves (2006), How Are Investment Decisions Made? Commissioned by the Task Force

to Modernise Securities Legislation in Canada, Evolving Investor Protection

Dreman, D., Johnson, S., MacGregor D.G and Slovic P. (2001), A Report on the March 2001

Investor Sentiment Survey, Journal of Psychology and Financial Markets, Vol.2, No.3:

126-134

Ronald C. Lease, Wilbur G. Lewellen, Gary G. Schlarbaum (1974), The Individual Investor:

Attributes and Attitudes, The Journal of Finance, Vol.29, No.2, Blackwell Publishing

Luigi Guiso and Tullio Japelli (2005), Awareness and Stock Market Participation, Review of

Finance, pp 537-567

60

Zhen Liu (2009), Fair Disclosure and Investor Asymmetric Awareness in Stock Markets, Stony

Brook University, New York USA No.1969

Gary Charness and Uri Gneezy (2003), Portfolio Choice and Risk Attitudes: An Experiment

Stephen Diacon (2002), Risk Averse or Loss Averse: The Behaviour of UK Personal Investors,

Centre for Risk& Insurance Studies, the University of Nottingham

Henriettee Prast (2004), Investor Psychology: A Behavioral Explanation of Six Finance Puzzles,

Research Series Supervision No.64

Elke U. Weber and Richard A. Milliman (1997), Perceived Risk Attitudes: Relating Risk

Perception to Risky Choice, Management Science, Vol.43, No.2, pp 123-144

Ning Zhu (2002), The Local Bias of Individual Investors, Yale ICF Working Paper No.2-30

Maarten Van Rooij, Annamaria Lusardi and Rob Alessie (2007), Financial Literacy and Stock

Market Participation, Michigan Retirement Research Center Working Paper WP 2007-

162

Dohmen, Thomas, Armin Falk, David Huffman, Uwe Sunde, Jurgen Schupp, Gert G. Wagner.

(2009), Individual Risk Attitudes: Measurement, determinants and behavioral

consequences, Journal of the European Economic Association forthcoming

Johnson, Joseph G., Andreas Wilke, Elke U. Weber (2004), Beyond a trait view of risk taking: A

domain-specific scale measuring risk perceptions, expected benefits, and perceive-risk

attitudes in German-speaking populations, Polish Psychological Bulletin, Vol.35, No.5, pp

153-163

Warneryd, Karl-Erik (1996), Risk Attitudes and Risky Behaviour, Journal of Economic

Psychology, Vol.17, No.6, pp 749-770

61

Weber, U. Elke, Ann-Rene Blais, Nancy E. Betz (2002), A domain-Specific Risk Attitude Scale:

Measuring risk perceptions and risk behaviors, Journal of Behavioral Decision Making,

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62

Appendix 1: Questionnaire MAKERERE UNIVERSITY BUSINESS SCHOOL

GRADUATE RESEARCH CENTRE Dear respondent, This instrument is designed to facilitate collection of data on Investor Awareness, Perceived Risk Attitudes and Stock Market Investor Behaviour: A Case of Uganda Securities Exchange (USE) I am undertaking a study on Investor Awareness, Perceived Risk Attitudes and Stock Market Investor Behaviour: A Case of Uganda Securities Exchange (USE) and I have chosen you as a respondent. The knowledge and experience you have in this area is vital in providing the necessary information to make this study a success. This study is carried out purely for academic purposes and the information given will be treated with confidentiality and for only the purposes of this study. This is therefore to request for your time in answering this questionnaire. Thank you very much. PART A: General Information Please tick where appropriate A1. Age of respondent 18-27 years 28-36 years 37-46 years above 46 years A2. Sex of Respondent Male Female A3. Highest Level of Education Attained Primary Secondary Certificate& Diploma Degree &above A4. How much do you earn monthly? Less than 500,000 510,000-5,000,000 5,100,000-10,000,000 10,100,000&above A5. For how long have you traded on the USE? 1-3 years 4-6 years 7-9 years 10 years &above A6. Which stocks are you trading in?

a. Uganda Clays Share

b. British American Tobacco share

c. Stanbic Bank share

d. KCB share

e. Equity Bank share

f. DFCU Bank share

1 4 3 2

1 2

4 3 2 1

1 4 3 2

63

g. Bank of Baroda share

h. Kenya Airways share

i. EABL share

j. Jubilee holdings share

k. New Vision share

l. Nation Media Group share

m. National Insurance Corporation share

n. Centum investment co. ltd share

A7. The Brokerage firm trading with a. Dyer & Blair b. African Alliance c. Baroda Capital Markets d. Renaissance Capital e. Crested Stocks Financial Services f. Equity Stock Brokers g. UAP Financial Services h. Crane financial Services

A8. How often do you trade on the USE?

a. Weekly

b. Monthly

c. Quarterly

d. Semi annually

e. Yearly

64

PART C: Investor Awareness C Investor Awareness Strongly

Disagree (1)

Disagree (2)

Not sure (3)

Agree (4)

Strongly Agree (5)

IA1 I am somewhat knowledgeable of stock market activities on the USE

IA2 I usually follow the stock market through Financial news on TV at least twice a week

IA3 I usually follow the stock market through financial news papers every week

IA4 I clearly understand the role of brokerage firms in listing on the USE

IA5 I easily access the latest reports, prospectus and financial statements of any company on the USE annually

IA6 I always have trust when trading on the USE IA7 I usually attend seminars, conferences&

workshops hosted by the USE at least 3 times a year

IA8 I usually visit the USE website (at least every 3 months)

IA9 The USE often holds educational programmes to sensitize the public on a quarterly basis

IA10 My peers influence my participation on the stock market

IA11 Companies listed on the USE publish financial statements more frequently (every 3 months)

IA12 When seeking financial advice, I deal with licensed brokers, intermediaries or financial services companies

IA13 The USE gives reports on corporate developments of various companies listed on a timely basis

IA14 I have trouble paying attention to the information on the stock market

65

PART D: Perceived Risk Attitudes D Perceived Risk Attitudes Strongly

Disagree (1)

Disagree (2)

Not Sure (3)

Agree (4)

Strongly Agree (5)

PR1 I usually have a fear to invest in stocks that have a sure gain

PR2 I am hopeful when undertaking investment in stocks that have exhibited a sure loss

PR3 I am cautious about stocks which show sudden changes in price or trading activity

PR4 I usually have worry investing in stocks that have had a past negative performance in trading

PR5 My investment in stocks is largely based on investment knowledge, experiences and education

PR6 I am always attracted to investing in stocks

PR7 I usually consider the credibility of brokerage firms that provide the financial services

PR8 I can easily ascertain the expertise of the brokers offering service

PR9 It is always easy to determine the credibility of the stock market

PR10 I can easily tell the reputation of brokerage firms staffing service

PR11 I feel that the idea of participating in a buy/sell on the stock market is appealing

PR12 I am usually at ease with the stock trading system on the USE

PR13 I am often not afraid to invest in stocks that have shown a past positive performance in trading

PR14 I feel regret of a drop in the price of a stock I have purchased

66

PART E: Stock Market Investor Behaviour E Investor Behaviour Strongly

Disagree (1)

Disagree (2)

Not sure (3)

Agree (4)

Strongly Agree (5)

CP1 I always use predictive skills to time and outperform the market

CP2 I usually base on the purchase price of stocks as a reference point in trading

CP3 My trading on the USE is usually determined by past experiences in the market

CP4 I usually consider public information (news) when trading stocks

CP5 I always look at and analyse company news prospects before making a decision to buy or sell

CP6 I am more comfortable investing in shares of local companies than foreign companies

CP7 I always separate stocks while trading on the stock market depending on their performance

CP8 I usually buy shares based on future expectations rather than past performance

CP9 I often prefer to invest on a short term horizon on the stock market

CP10 I always prefer holding on to looser stocks and selling winners

SE1 I often blindly imitate decisions of others when making investment decisions

SE2 My decision to buy /sell greatly relies on personal feelings

SE3 I often consider the information that majority of investors focus on as a basis of trading on the stock market

SE4 I usually tend to sell looser stocks and hold on the winners when trading

SE5 My decision to buy/sell stocks is largely based on emotions

THANK YOU VERY MUCH