CHAPTER – II

REVIEW OF LITERATURE

Many Organizations and individuals conducted several studies on the

various aspects of the capital markets in the past. These studies were mainly
related to various instruments of capital market, shareholding pattern, new issue
market and scope, market efficiency, risk and return, performance and regulation
of mutual funds. However, not much of research was done on investment patterns
and investors‘ perceptions. Hence an attempt is made to review some of the
studies relevant to the topic in order to get into in depth details of the chosen
study.

In order to study the behavior a review of literature was done to develop the
concept and understand what had been done earlier. Stock market‘s performance is
not simply the result of intelligible characteristics but also due to the emotions that
are still baffling to the analysts. Despite loads of information bombarding from all
directions, it is not the cold calculations of financial wizards, or company‘s
performance or widely accepted criterion of stock performance but the investor‘s
irrational emotions like overconfidence, fear, risk aversion, etc., seem to
decisively drive and dictate the fortunes of the market.

Rajarajan (2000)1 in his study revealed that there was an association

between the lifestyle clusters and investment related characteristics.

Louhichi Wael (2004)2 examined the market behavior around the times of
annual earnings announcements made in the Paris Bourse to study both the
informational role of accounting numbers and the intraday speed of adjustment of
stock prices to new information.

39
 Szyszka Adam (2008)3 in his study on efficient market hypothesis to
behavioral finance analyzed how investor‘s psychology changes the vision of
financial markets. He found that investors are not always able to correctly value
the utility of decision alternatives, cannot update and estimate probability and
events and do not diversify properly.

Vanita Tripathi (2008)4 examines the perceptions, preferences and various

investment strategies in Indian stock market. Study reveals that investors use both
fundamental as well as technical analysis while investing in Indian stock market.
Most of the respondents strongly agree that various company fundamentals (such
as size, book to market equity, price earnings ratio, leverage etc.) significantly
influence stock prices and hence addition of these factors in asset pricing model
can better explain cross sectional variations in equity returns in India.

Gaurav Kabra, Prashant Kumar, Mishra, Manoj Kumar Dash (2010)5

from the study concluded that modern investor is a mature and adequately
groomed person. In spite of phenomenal growth in the security market and quality
Initial Public Offerings (IPOs) in the market, the individual investors prefer
investments according to their risk preference. A majority of investors are found to
be using some source and reference groups for taking decisions. Though they are
in the trap of some kind of cognitive illusions such as over confidence and narrow
farming, they consider multiple factors and seek diversified information before
executing some kind of investment transaction.

E. Bennet, Dr. M. Selvam, Eva Ebenezer, V. Karpagam, S. Vanitha

(2011)6concluded that the average value of the five factors, namely, Return on
Equity, Quality of Management, Return on Investment, Price to Earnings Ratio
and various ratios of the company influenced the decision makers. Further, other
five factors, namely, recommendation by analysts, Broker and Research Reports,
Recommended by Friend, Family and Peer, Geographical Location of the

40
Company and Social Responsibility were given the lowest priority or which had
low influence on the stock selection decision by the retail investors.

Giridhari Mohanta and Sathya Swaroop Debasish (2011)7studied that

investors invest in different investment avenues for fulfilling financial, social and
psychological need. While selecting any financial avenue they also expect other
type of benefits like, safety and security, getting periodic return or dividends, high
capital gain, secured future, liquidity, easy purchase, tax benefit, meeting future
contingency etc.

Kevin Daly and Anil Mishra (2002)8In general, the paper attempts to
identify and quantify those determinants that drive Australia‘s overseas financial
investments. In the aftermath of the recent global financial crisis it would appear
that information related to those factors that influence investment decisions is now
more urgent than at any time in the history of global funds management. More
research into the determinants of a country‘s international investment position
would therefore appear desirable, given that the number of relevant drivers appear
to be highly volatile and of a country-specific nature. The paper focuses on
understanding the relationship between capital flows and trade flows based on data
sourced from CPIS 1997 and 2001 data. To begin the investigation of the
determinants of Australia‘s geographical allocation of portfolio investment a series
of multivariate regressions have been employed. The broad relationships between
capital flows and trade flows, financial market shares and shares in world gross
national income are examined. Accordingly, variables are used for Australia‘s
exports and imports as calculated from the IMF Direction of Trade Statistics.

Warne (2012)9 The study attempts to understand the behaviour of

individual investor in stock market, specifically their attitude and perception with
respect to the stock market. A survey is conducted to attain the objectives of the
paper. Respondents are classified in to different categories on the basis of income,

41
profession, education status, sex and age. Primary data is collected from a sample
around 50 investors of Ambala District. Finally there are different factors which
affect the investment behaviour of individual investors such as their awareness
level, duration of investment etc. The study reveals that the respondents integrate
the objectives of saving, the factors influencing the saving and the sources of
information for decision making. The annual income and the annual saving are
given importance of consideration by the respondents, because the level of income
decides the level of savings. Today‘s investors are fully aware about the stock
market. The market movements affect the investment pattern of investors in the
stock market.

Akiko Kamesaka, John R. Nofsinger, HidetakaKawakita (2010)10

discussed in the debate whether investor trading decisions are influenced more by
information about value or by psychological biases. Two categories of theoretical
trading models have been developed to explain the two potential influences of
behavior. The information-based category of models posits that trading is based on
informational advantages. These models suggest that informed investor trading
would exhibit a positive feedback, or momentum, pattern of trading. That is, high
(low) returns in one period will be associated with a high degree of investor
buying (selling) in the next period. Investor trading may be characterized by
specific trading patterns, like positive feedback trading, empirical studies can
identify the actual trading patterns of investor groups. The purpose of this study is
to empirically characterize the trading style of seven different investor groups in
Japan. The groups are individuals, foreign investors, and five types of institutional
investors. To be consistent with theoretical models, we first look for the positive
and negative feedback trading patterns. Where positive feedback trading exists, we
attempt to identify its motivation using the post trading returns. While theory and
existing empirical studies can lead to ex ante hypotheses for some investor groups,
we find little direction for other groups.

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 Clifford Paul S. and Joseph Anbarasu11 Saving Pattern of People and the
Impact of Insurance on Savings with special reference to Tiruchirappalli saving
have failed to throw conclusive evidence. Against this background, the objective
of the study was to find the determinants of savings by analyzing saving behaviour
in India over a period of nineteen years i.e., from 1980-81 to1998-99. In order to
identify and analyze the important factors, which have contributed to the
fluctuation in the saving in India simple and multiple regression models were
reported. The impact of financial sector liberalization measures on household
sector saving rate in India was studied by constructing a continuous time series
financial sector liberalization index6. The impacts of the index, along with the
other determinants of household sector savings in India were estimated using a
general model. The results suggest a significant negative impact of the index on
household saving rate, which gives an indication of the increased credit
availability due to financial sector liberalization leading to increased consumption
rather than savings. Among the other determinants, absolute income is the major
significant and positive determinant of household sector saving rate in India in the
period of study. Elsewhere, the different measures of financial sector development
for a dynamic heterogeneous panel of African countries was studied to examine
the impact of financial sector development on private savings. An innovative
econometric methodology was also employed related to a series of co-integration
tests within a panel. This is an important contribution since traditional panel data
analysis adopted in previous studies suffers from serious heterogeneity bias
problems.

The empirical results obtained vary considerably among countries in the

panel, thus highlighting the importance of using different measures of financial
sector development rather than a single indicator. The evidence is rather
inconclusive, although in most of the countries in the sample a positive

43
relationship between financial sector development and private savings seems to
hold. The empirical analysis also suggests that a change in government savings is
offset by an opposite change in private savings in most of the countries in the
panel, thus confirming the Ricardian equivalence hypothesis. Liquidity constraints
do not seem to play a vital role in most of the African countries in the group, since
the relevant co-efficient is negative and significant in only a small group of
countries.

Lekshmi R Nair (2003)12, Gender and savings in rural India is a study

which uses data from rural India to examine the impact of the birth of a male
relative to the birth of a female (i.e., the "gender shock") on the savings,
consumption and income of rural Indian households. It is found that the gender
shock reduces savings for medium and large farm households, although there is no
evidence that the shock affects savings for the landless and the small farm
households. The effect of the shock on income and consumption for the former
group is estimated, in order to determine the source of the drop in savings. The
results indicate that the fall in savings subsequent to the gender shock arises from
its effect on consumption in the year following the birth, and from its effect on
income in other years. The determinants of private saving, in the process of
economic development, in the light of the Indian experience, is found that the
saving rate rises with both the level and the rate of growth of disposable income.
The real interest rate on bank deposits has a significant positive impact, but the
magnitude of the impact is modest. Public saving seems to crowd out private
saving, but less than proportionately.

Furthermore, the spread of banking facilities in the economy and the

inflation rate have a positive impact and changes in the external terms of trade a
negative impact on private saving.

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 Earlier studies have been carried out to determine the pattern of
Institutional investors Investment but Studies dealing with Investment pattern of
individual investors are very few. Previous Studies mainly concentrate on
Differences in individual investing pattern on the basis of Gender. Differences on
the basis of Age in Investment pattern is new avenue for research. Earlier studies
conclude that women invest their asset portfolios more conservatively than their
male counterparts. Schmidt and Sevak, (2006) Women‘s investment has
historically been lower than men‘s for several reasons, including Social and
various demographic concerns. However the differences continue to be significant
even after controlling for individual Characteristics.

Lopes (1987)13 In making any Investment Decision Risk Aversion and

Financial Literacy are a major factor. Although different literature available on
risk define it variedly but in common the word risk refers to situations in which a
decision is made whose consequences depend on the outcomes of future events
having known probabilities. Julie R. Agnew, either (2003) There is evidence that
Women are more risk averse then men in general and this translates to investing in
less risky assets in their investment plans. Differences in financial literacy between
men and women may also explain differences in their investment decisions. There
is some research on individual investors for e.g. Langer (1975)14 finds that self
reported risk tolerance does the best job of explaining differences in both portfolio
diversification and portfolio turnover across individual investors.

Dunham (1984)15 admits that although personality factors can change over
an extended period of time, the process is slow and tends to be stable from one
situation to another. Therefore, these factors are expected to influence the decision
making behavior of an individual.

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 Barnewall (1987)16 finds that an individual investor can be found by
lifestyle characteristics, risk aversion, control orientation and occupation.

Barnewall (1988)17 suggests the use of psychographics as the basis of

determining an individual‘s financial services needs and takes one closer to the
truth from the customer‘s perspective of need to build a marketing program.

Statman Meir (1988)18 observed that people trade for both cognitive and
emotional reasons. They trade because they think they have information, when in
reality they make nothing but noise and trade only because trading brings them joy
and pride. Trading brings pride when decisions made are profitable, but it brings
regrets when they are not. Investors try to avoid the pain of regret by avoiding
realization of losses, employing investment advisors as scapegoats and avoiding
stocks of companies with low reputations.

Harlow and Brown (1990)19 observes that psychologists tend to believe

that an individual‘s choice is primarily determined by factors unique to the
particular decision setting, whereas economists assume that there is some
individual specific mechanism playing a common role in all economic decisions.

Madhusoodanan (1997)20 and Odean (1998) ; Barber and Odean (2001);

Benartzi and Thaler (2001); Gervais and Odean (2001) and Daniel and Huberman
(2003)]. Barber and Odean (2000) explored the impact of intuitive thinking on
investment preference to study the experience of actual investors. In the secondary
market identified different categories of investors based on their characteristics
and attitude towards secondary market investments. Kuala Lumpur Stock
Exchange individual investors from Kula Lumpur and Petaling Jaya, jointly
conducted a study with 245 respondents and they reveal that there are some

46
differences between active and passive investors in terms of demographic and
psychographics, investment characteristics as well as investment behavior.

National Council of Applied Economic Research (NCEA) (1961)22

‗Urban Saving survey‘ noticed that irrespective of occupation followed and
educational level and age attained, households in each group thought saving for
the future was desirable. It was found that desire to make provision for
emergencies were a very important motive for saving for old age. Securities and
Exchange Board of India (SEBI) and NCEAR (2000) ‗Survey of Indian Investors‘
had been report that Safety and Liquidity were the primary considerations which
determined the choice of an asset. In this paper we are trying to find out the
Factors which influence individual investment decision, the difference in the
perception of Investors in the investing process on the basis of Age and the
difference in perception of the Investors on the basis of Gender.

The present study aims to put on some knowledge about key factors that
influence investment behavior and ways these factors impact investment risk
tolerance and decision making process among men and women and among
different age groups. The individuals may be equal in all aspects, but their
behavior is different in same situation. Earlier studies did research but they did this
only gender wise, in this study we are trying to find out the factors which affects
individual investment decisions by considering both age and gender wise. Hence
keeping this in mind, the present study is an attempt to find out Factors which
affects individual investment decision and Differences in the perception of
Investors in the decision of investing on basis of Age and on the basis of Gender.

Richard A. Duschl, Emmett Wright (1989)23 investigated the manner and

the degree to which science teachers considered the nature of the subject matter in
their decision making addressing the planning and the delivery of instructional

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tasks. The goal of the study was the development of grounded hypotheses about
science teacher‗s pedagogical decision making.

Goymda R and. Josephine Y (2005)24 provided an overview of para-

teachers in India. It traced its origins of para-teacher schemes in the country and
analyses the changing policy context where-in poorly paid and trained para-
teachers on contract were increasingly being recruited in place of regular teachers
in government schools. Drawing upon available research studies, the authors drew
attention to the detrimental implications that para-teacher programs had for
professionalization of teachers, the quality of schooling and equity concerns in
education.

Archna V. Hegde, Deborah J. Cassidy (2009)25 interviewed twelve

kindergarten teachers in their study, and a constant comparative method was used
to analyze the interviews. This study included a focus on academics vs. play, the
importance of worksheets, the importance of groups for socialization, and the
difficulties of implementing a play-based curriculum.

Mathivannan and Selvakumar (2011)26 studied on saving and investment

pattern of school teaches – A study with reference to Sivakasi Taluk, Tamil Nadu.
The study concludes that today, the teaching community has stated realizing the
importance of money and money‗s worth. They are initiated to prepare a budget
for the proposed expenses and compare it with the actual expenses met by them,
so that they are not influence by other tempting and fashionable expenses.

Dr. Dhiraj Jain and Parul Jain (2012)27 examines the savings and
investment pattern of school teachers -a study with reference to Udaipur District,
Rajasthan. The study concluded that in today‗s world money play vital role in
one‗s life and that the importance of money has been started being recognized by

48
the school teacher‗s community. They know the importance of money so they are
initiated themselves to prepare the budget and lessen down their expenses to meet
the future consequences. It has been evident from the study that most of the school
teachers are saving their money for the purpose of their children‗s education,
marriage and as security after retirement.

Ananthapadhman (2012)28 studied about the saving and Investment

Behaviour of Teachers - An empirical study. In the ultimate analysis individual
characteristics of teachers such as age, gender, marital status, and lifestyle
determined the savings and investment behaviour of teaching community in the
study region. In a more or less similar manner, their family characteristics such as
monthly family income, stage of family life cycle, and upbringing status emerged
as determinants of their savings and investment behaviour.

Asset allocation or decision of how much to allocate to different types of

avenues and securities is the fundamental issue in personal finance. Rajmohan
(2006)29 found in his study that financial knowledge is very important in
explaining the ownership of risky assets and the proportion of risky asset
investment in the total personal finance pattern of individuals.

Mukhopadhyay (2004)30 analyzed the profile of 200 investors in the city

of Kolkata and found that aged people prefer less risky investment while the
youngsters are aggressive in risky investments.

Rajarajan (1999)31 found that the life cycle of individual investors is an

important determinant in the size of investments in financial assets and the
percentage of financial assets in the risky category.

Hochguertel et al (1997)32 found that income, education and tax had a

positive impact on the proportion of financial wealth held in risky assets while age
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had a hump shaped relationship Guiso and Jappelli (1999)33 studied the profile of
8000 Italian households for the (28) A study of mutual funds... period 1989-1995,
studied the heterogeneity of portfolio among the households and found that
wealth, college education and index of financial information had significant
positive effect on the ownership and share of risky assets, while age showed a
hump shaped profile.

Yoo, Petor.S (1994) using 196234 Survey of Financial characteristics of

Consumers, and 1983 &1986 Survey of Consumer Finances, analyzed the
portfolio allocation among cash, bond, and equity and found that the relationship
between age and portfolio allocation is not linear; young and retired individuals
demand less risky assets, bonds than middle-aged individuals.

Manish Mittal and Vyas (2008)35 Investors have certain cognitive and
emotional weaknesses which come in the way of their investment decisions. Over
the past few years, behavioral finance researchers have scientifically shown that
investors do not always act rationally. They have behavioral biases that lead to
systematic errors in the way they process information for investment decision.
Many researchers have tried to classify the investors on the basis of their relative
risk taking capacity and the type of investment they make. Empirical evidence also
suggests that factors such as age, income, education and marital status affect an
individual's investment decision. This paper classifies Indian investors into
different personality types and explores the relationship between various
demographic factors and the investment personality exhibited by the investors.

Kabra, G., Mishra, P.K. and Dash M.K. (2010)36, studied the factors
effecting investment behavior and concluded that investors age and gender are the
main factors which decide the risk taking capacity of investors.

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 AjmiJy.A. (2008)37 used a questionnaire to know determinants of risk
tolerance of individual investors and collected responses from 1500 respondents.
He concluded that the men are less risk averse than women, less educated
investors are less likely to take risk and age factor is also important in risk
tolerance and also investors are more risk tolerance than the less wealthy
investors.

Kaneko H. (2004)38 focused on investment trusts and debated the behavior

of individual investors and found that investment trusts are only the means of
managing assets. Chandra collected the data from survey to know the factors
influencing Indian individual investor behavior in stock market. Using univariate
and multivariate analysis and found five major factors that affect the investment
behavior of individual investor in stock market namely prudence, and precautions
attitude, conservatism, under confidence, informational asymmetry and financial
addition . Finally he concluded that these are the major psychological components
seem to be influencing individual investor‘s trading behavior in Indian stock
market.

Tamimi, H. A. H.39 identified the factors influencing the UAE investor

Behavior. Using questionnaire found six factors were most influencing factors on
the UAE investor behavior namely expected corporate earnings, get rich quick,
stock marketability past performance of the firm‘s stock , government holdings
and the creation of the organized financial markets.

Review of Literature shows that how retail investor‘s personal

characteristics influence their various investment choices. If a common theme is
present in this literature, it is that personal characteristics influence investors‘
perception of risk and their willingness to assume risks. In turn the perception of
risk determines investment behavior of retail investors. However, a prevailing

51
question left unanswered is the extent to which individual‘s personal
characteristics influence their intentions about investing. The expected utility
approach of Von Neumann and Morgenstern (1947) has provided the foundation
for the primary view of risk in economics and finance for many years. The main
concept in their model is that the maximization of expected utility is the sole factor
in making decisions.

Markowitz (1952)40 proposes a two-criterion approach when an investor is

faced with the desire for higher returns but not wanting the uncertainty of returns,
which investor perceives as risk. The literature has developed into two schools of
thought as researchers have sought to explain the choices investors make about
risk within their investments. One group of scholars has used demographic
features that relate the significance of gender, ethnicity, wealth, income, age and
variety of other factors to the explanation of investment management decisions.
The other group has its foundations in psychology, using investors‘ psychological
characteristics to explain choices that are made concerning investment decisions.
Although an interesting array of demographic characteristics have been used to
explain what drives the investment behavior of individuals, the discussion
continues in the literature concerning the psychological antecedents that would
accompany this human behavior. A variety of studies have attempted to explore
the psychological explanations for investor behavior. In the demographic studies,
the implications of gender are mostly perceived by various researchers are key in
explaining the behavior of investors. Barber and Odean (2001), Hallahan, Faff and
McKenzie (2004), Bajtelsmit and Bernasek (1996), Worthington (2006), Felton,
Gibson and Sanbonmatsu (2003), Bajtelsmit, Bernasek and Jinakoplos (1999),
Hariharan, Chapman and Domian (2000) and Oslen and Cox (2001) have
concluded that gender plays a key role in risk aversion. Filbeck, Hatfield and
Horvath (2005) used the Myers-Briggs Type Indicator to assess risk tolerance

52
differences between people with different personality characteristics. From the
discrete personality groupings in the Myers-Briggs, the researchers are able to
establish behavioral linkages to risk tolerance of individual investors. Their
findings confirm that personality type does explain some aspects of investment
behavior. Read and Loewenstein (1995) studied diversification bias in the context
of consumer choices. French and Poterba (1991) estimate the domestic ownership
share of the world‘s five largest stock markets in 1990: US 92.2%, Japan 95.7%
and Germany 79%. Goetzmann and Kumar (2001) examine the diversification of
investors with respect to demographic variables of age, income and employment.
Kahneman D and Riepe M.W (1998) focus on biases in beliefs & preferences of
which financial intermediaries should be aware and provide recommendations on
how to avoid them or mitigate their harmful effects of biases. Keller C and Siegrist
M (2006) analysed the influence of financial risk attitude and values-related
money and stock market attitudes. Odean T (1998) identified that a particular class
of investors sell winners more readily than losers. This is in spite of alternative
rational motivations are controlled for these investors continue to prefer selling
winners and holding losers. Shiller R.J. emphasized the very importance of
conversation in the contagion of popular ideas about financial markets. Shefrin
(2000) in the ‗Beyond Greed and Fear‘ explained the Psychology of individual
investors. Lo et al. (2005) explained that the lack of correlation between trading
performance and personality traits. Goldberg and Von Nitzch (2001) explained a
personal experience of a day trader who goes through many emotional stages
during various stages like profits and losses cycles.

Thomas Bailard, David Biehl and Ronald Kaiser(1986)41 developed a

model called Five-Way model features the classifying investor personalities along
two axes- level of confidence and method of action-it introduces an additional
dimension of analysis. Thomas Bailard, David Biehl and Ronald Kaiser provided

53
graphic reorientations of their model and this model classified investor
personalities along two axes: level of confidence in vertical axis and method of
action in horizontal axis. The first sub classification that the model incorporates
deals with how confidently an investor approaches life in general-including issues
unrelated to money. When negotiating a wide variety of life choices, are
individuals rigidly self-assured, or do they suffer from misgivings and anxiety?
The second element of the BB&K model asks whether investors are methodical,
careful and analytical in their approach to life or whether they are emotional,
intuitive and impetuous. These two elements can be thought of as two axes of
individual psychology: one axis is called ―confident anxious‖, and other is called
―careful-impetuous‖.

Amos Tversky, Daniel Kahnehan, (1986)42 According to this study there

is a lack of conciliation between the normative and the descriptive theory of
choices. Normative analysis which is used to predict and explain actual behaviour
is supported by three statements. First, people are effective in pursuing their goals
and they are more effective when there are incentives. Secondly, competition
favours rational individuals and organizations. Third, an intuitive appeal of the
axioms of rational choice makes it plausible that the theory derived from these
axioms support the acceptable account of choice behaviour. This paper analyses
the foundations of the normative model and proves that the deviation of actual
behaviour from the normative model is too widespread to be ignored, too
systematic to be dismissed as a random error. Thus, the normative and descriptive
model of choice cannot be reconciled. The descriptive model of choice accounts
for preferences that are anomalous in the normative theory.

GerlindeFellner, Boris Maciejovisky, (2002)43, in their study finds the

relationship between individual risk attitudes measured by binary lotteries and
certainty equivalents to market behaviour. Assessment of risk attitude is very
54
important in the domain of financial and economic activities. Also, risk attitude is
very useful in legal matters and in measures of performance and success. Also,
consultants inform investors about the various investment avenues in terms of risk
criteria for which basic risk classifications are done by them. Individual Risk
attitude can be measured either by cardinal utilities or psychometric methods.
Cardinal utilities depend mainly on binary lottery methods with known probability
distribution thus measuring risk attitude from the curvature of the utility function.
Psychometric methods use questionnaires asking whether they accept a set of
statements or not. Both these methods accept risk attitude as a stable personality
trait. The test was done on 26 independent markets and 280 participants. Results
indicate that two measures of risk preference, i.e., Binary lotteries method and
Certainty equivalents methods are poorly correlated. According to binary lotteries
choices method, higher the degree of risk aversion, lower the observed market
activity. Certainty equivalents on the other hand are not related to market
behaviour. This study reveals one more thing. According to Binary lottery choices
method, females are more risk averse than males. Again, we do not observe a
similar pattern with respect to certainty equivalents. However, females generally
show less market activity than males.

Melainie Powell, David Ansie, July (1997)44 This paper studies whether
gender differences in risk propensity and strategy in financial decision making can
be viewed as general traits or whether they arise because of contextual factors. The
results of this study tells that females are less risky seeking than males irrespective
of familiarity and framing of , costs or ambiguity. It also says that males and
females adopt different strategies in financial decision environments but these
strategies have no significant impact on their ability to perform. Harrison Hong,
Jeffery D.Kubik, Jeremy C.Stein. This study proposes that stock-market
participation is influenced by social interaction. Any given "social" investor finds

55
the market more attractive when more of his peers participate this theory is
supported using data from the Health and Retirement Study, and found that social
households—those who interact with their neighbours, or attend church—are
substantially more likely to invest in the market than non-social households.
Moreover, consistent with a peer-effects story, the impact of sociability is stronger
in states where stock-market participation rates are higher.

Sushant Nagpal and Bodla B.S, (2009)45 observed through their study that
the individuals may be equal in all aspects, but their financial planning needs are
very different. Demographics alone no longer suffice as the basis of segmentation
of individual investors. It is by using lifestyles or psychographics along with
demographics that synergism between investors can be generated. It was studied
that the modern investor is a mature and adequately groomed person.

The individual investors prefer less risky investments. Blind investments

are scarce, as a majority of investors are found to be using some source and
reference groups for taking decisions. Brokers who are in direct touch with
investors play a vital role in keeping the capital market lively by providing various
services to investors. Investors have made media as a part of their investment life.
Psychographics play an important role in determining investment behavior and
preferences of individual investors. The study concludes that investors‘ lifestyle
predominantly decides the risk taking capacity of investors.

William E. Warren, Robert E. stevens and C. William McConkey

(1990)46, in this study, it is found that Demographics characteristics are a good
predictor of whether investors will be light or heavy investors. None of the
lifestyle characteristics proved to be a predictor of stock and bond ownership. But
demographics were found to be a strong predictor of whether investors would have
heavy or light concentrations in stocks and bonds. Not only do life style
dimensions help differentiate between investor behavior types like active or
56
passive, they may also be useful in differentiating between light and heavy
investors in particular investments in stock and bonds.

Meenu Verma(2008)47 The author has observed that demographic profile

and investor personality can be the two determinants for making perception about
the investor psychology. The study revealed that real estate, followed by mutual
funds are the most preferred choices for investment among the investors. It was
noted males prefer real estate, PPF and equity shares as attractive avenues for
investment, females prefer bank FD, insurance and bullions. Young investors find
investing in equity shares/derivatives more comfortable, while old investors prefer
PPF as their first choice. Middle aged investors prefer investing in mutual funds
and NSC. Thus it clearly shown that as age increases, the ability to take risks
decreases and people go towards safer investments. People with low income prefer
investments in low risk investments like NSC. People with high income like to
invest in real estate. Middle income groups prefer investing in bank FD and
mutual funds. The study provides the evidence that the investment choice depends
on and is affected by the demographic variables such as gender, age, income,
education, occupation as well as various personality types such as conservative,
medium moderate and aggressive.

Abhijeet Chandra (2009)48. In this literature, the author has analyzed the
impact of competence of individual investors on their trading behavior in the stock
market. Individual investors take trading decisions based on their self-perceived
competence that is influenced by several factors. The study examined the factors
that determine the competence level of individual investors. Age, education, and
income were found to be the most influencing factors of the individual investors'
competence in the stock market activities and trading behavior. The results of the
study reveal that a person invests as per his/her own judgments once he/she
perceives himself/herself more knowledgeable about investing. It finds that

57
investors having high, high to moderate income and professional qualification are
supposed to be more confident about their competence when it comes to trading in
stock markets. Thus, it can be said that competence effect rules the trading
behavior of individual investors.

Lucy X. Zhong and Jing Jian Xiao (1994)49 This article was based on the
characteristics of individual bond and stock holders, using data from the 1989
Survey of Consumer Finances. Based on this work, the present research would like
to concentrate on the individual investors of India.

Daniel Kahneman (1988)50 introduces useful distinctions among three

approaches to the analysis of decisions. Normative analysis is concerned with the
rational solution to the decision problem. It defines the ideal that actual decisions
should strive to approximate. Descriptive analysis is concerned with the manner in
which real people actually make decisions. Prescriptive analysis is concerned with
practical advice and help that people could use to make more rational decisions.
Financial advising is a prescriptive activity whose main objective should be to
guide investors to make decisions that best serve their interests. To advise
effectively, advisors must be guided by an accurate picture of the cognitive and
emotional weaknesses of investors that relate to making investment decisions. The
goal of learning about cognitive illusions and decision-making is to develop the
skill of recognizing situations in which a particular error is likely. In such
situations, intuition cannot be trusted and it must be supplemented or replaced by
more critical or analytical thinking – the equivalent of using a ruler to avoid a
visual illusion. Providing timely warnings about the pitfalls of intuition should be
one of the responsibilities of financial advisors. More generally, an ability to
recognize situations in which one is likely to make large errors is a useful skill for
any decision-maker. They study concludes with a checklist that advisors can use to
measure their effectiveness at dealing with these biases.

58
 Syed Tabassum Sultana (2010)51, opines in his study, that, Indian investor
today have to endure sluggish economy, the steep market declines prompted by
deteriorating revenues, alarming reports of scandals ranging from illegal corporate
accounting practices like that of Satyam to insider trading to make investment
decisions. She, in her study, while discussing the characteristics of the Indian
individual investors along, makes an attempt to discover the relationship between
a dependent variable i.e., Risk Tolerance level and independent variables such as
Age, Gender of an individual investor on the basis of the survey. Indian investors
are high income, well educated, salaried, and independent in making investment
decisions and conservative investors. From the empirical study it was found that
irrespective of gender, most of the investors (41%) are found have low risk
tolerance level and many others (34%) have high risk tolerance level rather than
moderate risk tolerance level. It is also found that there is a strong negative
correlation between Age and Risk tolerance level of the investor. Television is the
media that is largely influencing the investor‘s decisions. Hence, this study can
facilitate the investment product designers to design products which can cater to
the investors who are low risk tolerant.

Terrance Odean (1998)52, in his study, tests the disposition effect, the
tendency of investors to hold losing investments too long and sell winning
investments too soon, by analyzing trading records for 10,000 accounts at a large
discount brokerage house. These investors demonstrate a strong preference for
realizing winners rather than losers. Their behavior does not appear to be
motivated by a desire to rebalance portfolios, or to avoid the higher trading costs
of low priced stocks. Nor is it justified by subsequent portfolio performance. For
taxable investments, it is suboptimal and leads to lower after-tax returns. Tax-
motivated selling is most evident in December.

59
 Zhong& Xiao (1995)53 Socio-demographic variables included educational
levels, age, gender, marital status, and race of the household head. Financial
variables included the level of income, checking amount and savings amount. Five
psychological variables were: expectation for economy, expectation for interest
rates, and expectation for family income, saving motives and financial planning
horizon Age and stock holdings are positively related Kreinin1959. However,
older investors have been found to be more conservative in their investment
behavior (Baker &Haslem, 1974; Lease, Lewellen &Schlarbaum, 1974 and 1977,
Male investors were more likely than females to invest in real estates, common
stocks, and corporate bonds, but females were more likely to own government
bonds (Haynes & Helms, 1990). An earlier study indicated that females were more
likely than males to emphasize the importance of expected dividend yield and
price stability (Baker &Haslem, 1974). There are various types of motivational
issues and personality which are related to a specific individual and these will play
an effective role in the savings and investment decisions related with each
individual (Maslow, 1954).As the risk factor is inseparable with the fictions like
investment or savings, hence it is necessary to understand the financial risk
tolerance factors of an individual. The various risk tolerance factors associated
with an individual play very important role in his/her various financial decision
makings (Hallahan, Faff & McKenzie, 2004). Perceived saving motives were
different in terms of the household‘s home ownership, marital status, number of
children, life cycle stage, employment status, income, asset and debt categories,
net worth, and the head‘s gender and education (Xiao &Noring, 1994).

Shefrin (2000)54. Shiller (2000)55 who strongly advocated that stock

market is governed by the market information which directly affects the behavior
of the investors. Several studies have brought out the relationship between the
demographics such as Gender, Age and risk tolerance level of individuals. Of this

60
the relationship between Age and risk tolerance level has attracted much attention.
Wallach and Kogan(1961) were perhaps the first to study the relationship between
risk tolerance and age.

Kelly and Williamson (1968)56 regressed per capita household saving

against per capita household income for five household age groups in Indonesia.
They found that the age of the head of the household is an important determinant
of household saving in rural households and that the average and marginal saving
rates rose with the share of agricultural income and the presence of positive
interaction between wealth and saving. However, Shultz (2005) who analyzed the
demographic determinants of savings in Asia found no significant relationship
between savings and age composition. In India, one of the earliest attempts was
made by NCAER in 1964 when a survey of households was undertaken to
understand the attitude towards and motivation for saving of individuals. Another
NCAER study in 1996 analysed the structure of the capital market and presented
the views and attitudes of individual shareholders. SEBI – NCAER Survey (2000)
was carried out to estimate the number of households and the population of
individual investors, their economic and demographic profile, portfolio size, and
investment preference for equity as well as other savings instruments. This was a
unique and comprehensive study of Indian Investors, for which data was collected
from 3,00,0000 geographically dispersed rural and urban households. Some of the
relevant findings of the study were : Households preference for instruments match
their risk perception; Bank Deposit has an appeal across all income class; 43% of
the non-investor households equivalent to around 60 million households
(estimated) apparently lack awareness about stock markets; and, compared with
low income groups, the higher income groups have higher share of investments in
Mutual Funds (MFs) signifying that MFs have still not become truly the
investment vehicle for small investors. Nevertheless, the study had predicted that

61
in the next two years (i.e., 2000 hence) the investment of households in MFs is
likely to increase. In his research on Savings in Rural India,

Desai B.M. (1981)57 opines that rural savings are determined by both
"ability" and "incentives" to save. This is because rural households hold their
savings in monetized as well as non-monetized forms. Moreover, some of the
monetized savings are held in the form of physical assets. Thus, only those
monetized savings which are invested in financial assets of the informal Rural
Financial Market can be considered as potentially mobilizable by the financial
agencies. Institutionalization of such savings would improve their efficiency by
promoting better allocation among different areas, sectors, economic activities,
and also to entrepreneurs.

Uma Datta Roy Choudhury (1968)58 studied the savings potential of

urban and rural households in India and in the process tried to determine the
possible savings and consumption functions separately for urban and rural areas.
The rural households, according to the results, have an extremely low rate of
saving with income elasticity of saving of less than unity. For the urban
households on the other hand, the income elasticity of saving is high enough to
suggest the possibilities of considerably high savings potential. To understand the
consumption behaviour of these households, the long-run and the short-run
marginal propensities to consume and the marginal propensities to consume out of
―permanent or normal income and transitory income have been worked out. For
the urban sector none of these give encouraging enough results and the analysis
has been extended to examine whether other factors like prices and household
assets are of any significance.

Whereas for the rural sector, Milton Friedman's theory (1957)59 of

permanent or normal income is somewhat substantiated, other factors like

62
transitory income, prices and assets appear to influence urban consumption
behaviour though no single one of them substantially enough. A negligible effect
of permanent income on urban consumption behaviour is, on the other hand, very
clearly suggested by the results.

Salam (2004)60 in their study had observed the savings behaviour in India.
The objective of the study was to find the determinants of savings by analyzing
saving behaviour in India over a period of nineteen years i.e., from 1980-81 to
1998-99. The methodology adopted was simple and multiple regression models
were used. From the analysis it was found that a favourable macro – economic
environment supported by strong structural reforms including liberalization of
financial markets should help domestic saving to increase substantially.

Mishra P.K. (2010)61 investigated the dynamics of the relation between

savings and investment in India for the period 1950-51 to 2008-09. Using annual
data, the study reveals the co-integration between savings and investment and
suggests the feedback causality between them. And, the most interesting part of
the result is that while co-integration provides the evidence of long-run
equilibrium relationship between savings and investment, the time series plotting
of both the variables over the study period infers the fact that investment remained
greater than the savings in India.

Abhijeet Chandra (2009)62 analyzed the impact of competence of

individual investors on their trading behavior in the stock market. The study was
conducted in the Delhi-NCR (National Capital Region). Individual investors are
seen trading too frequently. This impacts their returns from their investments, their
belief in the stock markets, and also the functioning of financial markets to some
extent. Investors with high level of competence tend to trade more frequently.
While some factors affect individuals' perception towards external issues, some

63
affect their belief in themselves, which in turn, influences their confidence and
belief in their own judgment and decision making. This holds true in the context of
investors in general and individual investors in particular. Individual investors take
trading decisions based on their self-perceived competence that is influenced by
several factors.

Mohan, Ramesh (2006)63, examined the relationship between savings and

economic growth, focussing on whether the causality is from savings to 29
economic growth or vice versa. He concluded that causality is from economic
growth rate to growth rate of savings. A study of 32 countries by
Krieckhaus(2002) notes that a higher level of national savings led to higher
investment and consequently caused higher economic growth.

Somasundaram(1998)64 has found that bank deposits and chit funds were
the best known modes of savings among investors and the least known modes
were Unit Trust of India (UTI) schemes and plantation schemes. Attitudes of
investors were highly positive and showed their intention to save for better future.
Nearly two-thirds of the investors were satisfied with their savings. Both income
and expenses of a family influenced the level of satisfaction over savings. A large
proportion of investors were concerned about their children's well-being. Among
the dissatisfied investors, majority were of the opinion that cost of living was too
high. The most common mode of investment was bank deposits. However, a shift
was noticed from bank deposits to other forms of investment. Almost all the
investors had invested in gold and silver. Among several parameters in investing,
safety of money was considered to be the most important element. Next, the
investors expected regular return from their investments. National Council of
Applied Economic Research (NCAER) (1961) 'Urban Saving Survey' noticed that
irrespective of occupation followed and educational level and age attained,
households in each group thought saving for the future was desirable. It was found
64
that desire to make provision for emergencies were a very important motive for
saving and importance was given next to 'saving for old age'. Among motives for
saving, provision for emergencies, old age, and purchase of house occur with same
frequencies in 31 all occupational and educational groups. The proportion of
households expressing a preference for financial assets increases with the level of
education. The preference for financial assets, especially bank accounts and small
savings, while rising markedly with education, does not seem to increase with
income, except at the lowest end of income distribution. Thus, it would appear that
efforts must be taken to popularize financial forms of savings particularly among
the less educated members of upper-income group. Profitability seems to be the
most important motive for determining saving preference. Safety is another
significant consideration for most people and liquidity ranked third. Jack Clark
Francis (1986) revealed the importance of the rate of return in investments and
reviewed the possibility of default and bankruptcy risk. He opined that in an
uncertain world, investors cannot predict exactly what rate of return an investment
will yield. However he suggested that the investors can formulate a probability
distribution of the possible rates of return. He also opined that an investor who
purchases corporate securities must face the possibility of default and bankruptcy
by the issuer. Financial analysts can foresee bankruptcy. He disclosed some easily
observable warnings of a firm's failure, which could be noticed by the investors to
avoid such a risk.

PreethiSingh (1986)65 disclosed the basic rules for selecting the company
to invest in. She opined that understanding and measuring return and risk is
fundamental to the investment process. According to her, most investors are 'risk
averse'. To have a higher return the investor has to face greater risks. It concludes
that risk is fundamental to the process of investment. Every investor should have
an understanding of the various pitfalls of investments. The investor should

65
carefully analyse the financial statements with special reference to solvency,
profitability, EPS, and efficiency of the company. L.C.Gupta(1992) revealed the
findings of his study that there is existence of wild speculation in the Indian stock
market. The over speculative character of the Indian stock market is reflected in
extremely high concentration of the market activity in a handful of shares to the
neglect of the remaining shares and absolutely high trading velocities of the
speculative counters. He opined that, short- term speculation, if excessive, could
lead to "artificial price". An artificial price is one which is not justified by
prospective earnings, dividends, financial strength and assets or which is brought
about by speculators through rumours, manipulations, etc. He concluded that such
artificial prices are bound to crash sometime or other as history has repeated and
proved. Donald E Fischer and Ronald J. Jordan (1994) analysed the relation
between risk, investor preferences and investor behaviour. The risk return
measures on portfolios are the main determinants of an investor's attitude towards
them. Most investors seek more return for additional risk assumed. The
conservative investor requires large increase in return for assuming small increases
in risk. The more aggressive investor will accept smaller increases in return for
large increases in risk. They concluded that the psychology of the stock market is
based on how investors form judgements about uncertain future events and how
they react to these judgements.

The Economic Times66 commented on the "Paperless World and described

what makes dematerialisation the preferred choice and how it reduces risk. The
dematerialised trading was introduced in India in 1996 to reduce pains and risks in
settlement through the loss of share 34 certificates in transit, bad deliveries, delays
in transfer and forged / fake / stolen certificates. It helps in doing away with the
risk of loss in transit by directly crediting the account with bonus shares and

66
rights. There is no risk of bad delivery because the ownership status is clearly
captured in the depository‘s computers.

Jayaraman(1987)67 has stated that instead of issuing special bonds for

unearthing black money the Government of India can encourage investment of
black money in various small savings schemes. He further stressed the 36 need to
draft the assistance of voluntary agencies at the school and college level for further
mobilization of savings. Arangasami(1992) has observed that more and more
dependence on mobilization of resources through small savings will ensure and
promote self-reliance. He concluded that the Central government should give
proper assistance and encouragement to the small savings agencies, which will be
useful not only in mobilization of funds but also for the economic development.
The study by Mukhi(1989) has revealed that NSC has been one of the most
popular tax savings instruments in this country. He has stated that contractors and
others who have to provide security while bidding for contracts find it extremely
convenient to buy NSC and pledge these to the appropriate authorities while
earning 12 per cent per annum on the pledged securities. He also stated that the
major attraction of NSC is its simplicity. Even the average investor does not have
to scratch his head to understand the scheme.

Conclusion
The available literature suggests that there are no studies available which
studied the investing behaviour across the rural landscape, with specific reference
to investing in stock markets. It is in this context, that this literature survey proved
useful to the researcher in identifying the gap analysis and accordingly the
research design was evolved, so as to explore an opportunity related to investment
in stock markets by the Indian rural landscape using such ICT initiatives already
existing at certain rural locations.

67
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