What Matters to Individual Investors? Evidence from the Horse’s Mouth article by James Choi and Adriana Robertson discusses financial investment such as stocks. The survey of the research was done in the United States to gather academic theories about financial decisions and beliefs. The article is categorized as the Journal of Finance and Economics. Therefore, the purpose of the research paper is to critically analyze the article and criticize it depending on the presentation of the research.
Purpose and theoretical background of the study
The purpose of the research was to identify how well leading academic theories described their financial decisions and beliefs. According to the authors, the majority of hypothesized factors affected market participation of the fixed stock costs. Besides, they influenced transactional factors, rare disasters, and investment horizon and portfolio equity share. They further argued that the majority of investors believe in past mutual fund performance. The performance ought to result in a good signal of stock-piling skill. The belief shows that actively managed funds are spared from diseconomies of scale. However, financial literacy provides no shortage of information that affect investor beliefs and motivations. Such theories provide aggregated choices that influence asset prices. James and Adriana believed that testing such theories based on observational data might be difficult.
Hypothesis
- Value of investible financial assets have higher returns
- Investors misperceive the relative returns to active management versus passive management.
- Differences in expected return across stock portfolios formed on value and momentum are well organized.
Methodology
The research adopted survey design in testing leading theories that determined portfolio equity share. Consequently, the method was preferred because it identified reasons that determine investment in actively managed mutual funds. Finally, the method will determine the perception of people on cross-section stock returns. The survey procedure was conducted as the following; first, Questions were mapped closely to the applicable theories. The survey questions were piloted in Amazon’s Turk online labor market platform using United States respondents. Free responses were included to allow respondents to provide additional factors. The questions were revised, and new ones were added based on the piloted responses.
Second, a second pilot test was done to test the understanding of respondents on the questions. Third, the feedback was solicited from researchers who acquainted with theories on research. The third pilot study was conducted to determine whether questions were relevant to respondents. However, the third pilot study revealed that 1% of the respondents did not understand the postulated questions. Fourth, the final survey was conducted on the RAND American Life Panel (ALP). Panelists in the United States were paid to provide survey answers. Payments were based on the time used to provide survey answers. The adopted rate was $40 per hour and $3 per survey. The invited members by RAND were 2,148 members who targeted a completion survey sample size of 1000 respondents. RAND charged a maximum of $34,500 to the researchers for the targeted sample size. One thousand two hundred twenty-five participants agreed to participate in the study, while 1,202 gave their consent. 1,080 respondents out of 1,202 revealed that they were aware of family retirement planning, debts, and assets. The financial respondent was based on a screen criterion.
Additionally, 27 participants revealed that they shared their status equally with their spouses. One thousand ninety-eight participants agreed to provide further payment factors, while 46 participants were dropped because they did not provide their feedback. The survey questions’ final sample was 1,013, with 39 participants giving similar responses on the equity allocation factor question. Completion of the survey was done between December 14, 2016, and December 27, 2016.
Results
The equity and share of portfolio revealed no dominant factor that determined the equity share decisions. 49% of the non-participants revealed that their wealth was too small to invest in stocks, which was a significant factor. 37% of the non-respondents showed that there were not interested in the stocks investment. 48% of employed respondents showed that they were interested in financial investment until they retire. 47% of all respondents showed that they retained their cash in hand to pay their expenses and cater for background risks such as illness and injury. Finally, 16% of respondents revealed that they had no intention to invest in stock due to the rule of thumb, peer and media advice, external habit, and stock market returns.
On the actively managed mutual funds, 51% of the respondents revealed that they were experienced in actively managed equity mutual funds. 48% stated that financial advisers recommended them. 27% of the eligible respondents argued that the lack of passive funds upon retirement made it difficult for them to invest in stocks, and it was considered the least factor. Results on the cross-section of equity returns revealed that 28% of respondents believed stock values have lower returns, while 28% said they had higher returns. 28% of wealthier respondents argued that stocks’ value had higher returns, while 22% stated it had lower returns. 24% of the results showed that wealthy investors believed high-momentum stocks were riskier.
State and understand Limitations
The survey research design has some weaknesses that may affect the validity and reliability of the research. Some of the respondents are not motivated enough to give accurate responses, which makes response differ significantly in the respondents. However, such measurement errors may affect the agreement ratings and ordinal ranking, which are informative of the research. Besides, respondents might not be aware of their decisions because they have not introspected the questions, or their memory might have faded away and subliminally influenced. Similarly, respondents may fail to recognize the factors in research as critical, thus giving false information. Such information results in biasness in the research design. However, if the falsified information accurately generates the predicted assumptions under such circumstances, it does not affect the entire research.
In understanding the limitations, it is necessary to perceive five reasons that rule the respondents’ decisions. First, the respondent’s feedback might not be related to the true decisions they make. An unrealistic set of assumptions by the respondents might accidentally predict the known phenomena perfectly. Second, beliefs and perceptions assist when choosing theories. Such theories may postulate similar predictions for quantities and prices. It may help investors to determine whether stocks have a higher risk or expected returns.
Third, people’s perception affects their decision-making approach in the future that translates to their actions. They present their input in contemporary society. Fourth, researchers are supposed to understand and acknowledge the decisions and behavior of others inherently. Finally, perceptions may influence people’s demand for advice, information, and debiasing strategies.
The implication to the field
The results have revealed that most people were interested in investing in stocks because they had enough financial resources. Lack of passive funding after retirement affected stock investment. Finally, a high percentage revealed that investment in stocks had lower returns as per expectations.
Overall evaluation
The research followed research ethics and principles before initiating the survey study. Data collection was effectively collected, and pilot testing ensured the relevance of the questions to the respondents. Respondents voluntarily accepted to participate in the research, and those wishing to withdraw were not coerced. Payments were done to respondents and RAND as per agreement. Finally, results were presented in percentages in table form, and data analysis was well carried out.
Overall, the article is educative because it has provided important information on stock investment. It is a breakthrough for people who are interested in investing in the field. Finally, the research was well organized, with all variables in consideration.