Predictors of preference for financial investment products using CART analysis

Abstract

PurposeThe purpose of this paper is to illustrate the use of a post hoc predictive segmentation procedure to find out the variables that are the most important predictors of investor's preference for specific financial investment products.Design/methodology/approachThe study considers various demographic, socio‐economic and psychographic variables for the purpose of understanding the investor's preferences. Using a sample of individual investors (n=377), a classification and regression tree (CART) methodology was used to determine whether psychographic variables were better predictors than demographic and socio‐economic variables for understanding an individual investor's preference for the investment alternatives.FindingsThe results showed that psychographic variables emerged as the most important predictors in the case of investment products with greater degree of risk, and the demographic and socio‐economic variables emerged as the most important for the investment instruments with lesser degree of risk. However, when the sample was divided based on occupation profile (government and non‐government), for both the fixed returns based instruments and the non‐fixed instruments, psychographic variables emerged as the most important predictors.Practical implicationsThese results show the need for financial service providers to consider the psychographic variables along with demographic and socio‐economic variables, so as to better understand and advise the financial consumers. This would enable the financial service institutions to target their audience more sharply, so as to develop appropriate marketing strategies and further build the investor's trust.Originality/valueThis paper is a first of its kind to empirically identify the most important variable that determines the financial consumer's preference for investment products in India, using CART technique. This study contributes to furthering the understanding of investor behavior.