Abstract
This paper reports evidence to support a relationship between risk propensity, risk perception, and risk-taking behaviour of investors in an emerging market. Primary data were gathered using a validated structured questionnaire, which was self-administered by respondents: there were 162 investors from 8 stockbroking companies. A multiple regression was used to test the direct and indirect effects of the identified behavioural characteristics on investment decision. Risk propensity was found to be positively related to risk-taking behaviour whereas risk perception was negatively related to risk-taking behaviour. It was further found that risk perception partially mediates the effect of propensity to take risk. This suggests that the perceptual framing of a situational context in the investors’ thought processes reduces but it does not totally overwhelm the innate personality traits with respect to either the investor’s risk-seeking or risk-averseness. The tendency to engage in risky behaviour is more psychological in nature. The implications of the research are further explored.
Highlights
Malaysia’s benchmark Kuala Lumpur Composite Index (KLCI) reached an all-time high of 1,872.52 points in December 2013
This study considered whether investors’ risk-behaviour in an emerging market (Malaysia) is influenced by two variables; risk perception and risk propensity
An additional measure included is whether risk perception mediates the effect of risk propensity on risk-behaviour
Summary
Malaysia’s benchmark Kuala Lumpur Composite Index (KLCI) reached an all-time high of 1,872.52 points in December 2013. The previous high coincided with the super bull-run of 1993 when the KLCI value was 1,275.30. The circumstances and seem to be different. Retail investors who made up 60 per cent to 70 per cent of the daily trading volume during the super bull-run have not returned in droves this time around. Retail investors have continually shunned the stock market since the losses retail investors took during the 1997 Asian Financial Crisis as well as during the 2008 subprime crisis. The nations’s Prime Minister declared in March 2010 that the state-controlled Employees Provident Fund (EPF) accounted for International Journal of Banking and Finance, Vol 10, Iss. 1 [2013], Art. 7
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