Impact of Selected Factors on the Financial Risk-Taking Propensity and Hypothetical Portfolio Creation of Individuals

Abstract

Investment decision-making and portfolio construction have long been studied by various financial theorists in the realm of traditional finance. The traditional finance theories were built around the idea that investors are rational beings holding optimal portfolios. The research carried out in recent decades has seen a paradigm shift in this idea that was once considered true. The fact that rationality in construction of an optimal portfolio cannot be generalised due to various psychological factors of investors has given rise to a new field of research called Behavioural Finance. Individual differences in financial decision-making are the core of the work done in Behavioural Finance. The present study analyses the influence of select cognitive factors, namely optimism, self control, mood and personality traits and non-cognitive factors consisting of demographic characteristics and financial literacy level, on the financial risk-taking propensity of individuals. The researcher has also analysed financial risk-taking and financial literacy as predictors of the type of portfolio composition and the role played by financial literacy as a moderator between financial risk-taking propensity and hypothetical portfolio construction in the research model. A total of 976 individuals from six administrative zones of India constituted the sample. The study's hypotheses were tested using statistical techniques such as structural equation modelling, ordinal logistic regression, t-test and ANOVA through SPSS and AMOS SEM software. The results supported most of the proposed relationships of the conceptualised model that were based on relevant theoretical background. Among the cognitive factors, two of the big five personality traits, namely conscientiousness and agreeableness, were insignificant in predicting the financial risk-taking propensity of individuals. All the other cognitive and non-cognitive study variables significantly predicted financial risk taking propensity and aligned with the literature and theory. In contrast to prior research findings, the personality trait neuroticism was found to influence risk-taking positively. Financial literacy played a significant moderating role between financial risk-taking and constructing a hypothetical portfolio. Behavioural finance studies in India are still at a nascent stage. The present study has attempted to empirically add to the flourishing body of knowledge and expand the existing literature from an emerging country standpoint. The study results also provide practical implications to the formal education bodies, financial service providers, individual investors and financial regulatory bodies to look into the various subjective cognitive and objective non-cognitive factors that deeply influence individual portfolio construction decisions.