6.1 Introduction
Chapter six presents a summary of the conclusions and discussions that were explained from the research findings, in regards of the overall purpose of the study. In addition, by taking into consideration these findings, recommendations will be provided on the biases that affect UK investors decisions making. Finally, the limitations of the study and any further research that may be advisable to carry out will also be explained.
6.2 Summary
The main objective of study was to examine whether behavioural biases impact UK investors decisions within the UK stock market. In summary, the research has determined that the psychology of investors plays a vital role in affecting their investment decisions in terms of risk taking. The study focused on the behavioural biases of overconfidence, representativeness, loss aversion, regret aversion and herding. All five factors have been distinguished to have an effect on investors risk taking decisions, however, at different degrees. A such the research showed that these five biases can explain up to 43.5% of the reasons why investors may be subject to taking more or less risks in their decisions when investing. The remaining 56.5% can be explained by other biases, thus, a need for further studies may be recommended in order to identify the additional biases that may affect investors risk taking behaviours.
6.3 Contributions of the Research
The study draws out an overall picture of the influence of certain behavioural biases on individual UK investors decision making. The research is based on the theories of 41 behavioural finance and is different from most previous studies on UK investors in the sense that it focused on modern finance instead of traditional finance. This study assesses the risk taking behaviour of UK investors who not only work in security companies and investment banks, but also random individuals who invest in stocks. Moreover, the research focuses on three theories and on the main biases of each theory, while many prior studies have focused on limited extents and only assess the biases of one theory. The five-point Likert Scale was used for behavioural answers and the data was tested by Correlation and Regression Analysis which proved the significance of behavioural finance on UK investors. Individual investors can benefit from the conclusions of the research, while security organizations and investment companies can apply these conclusions to help their investors make better decisions in terms of risk taking.
6.4 Limitations of the Research
It can be argued to a reasonable extent that the adopted research design and sample are satisfactory to achieve the objectives of the study. However, the research may be receptive to a few underlying challengers. Initially, the representation of investors may not have been sufficient. The sample of 180 respondents could had been larger and more diversified throughout the UK in order to more accurately reflect the behaviours of UK investors. For example, not all areas within the UK may have been covered and investors in other cities may have different intentions in terms of decision making. Thus, it may be that the conclusions do not represent the entire population of UK investors since it was not identified by which city the investor came from. However, having said that the sample size still satisfied the requirements of the statistical techniques used. Moreover, although this study has examined the most commonly used factors, it is limited to only five biases within the heuristics, prospect and herding theories. This means that investors decision making in terms of taking risks cannot be fully explained by this study. There is a necessity to advance the scope of tis study by incorporating 42 all applicable behavioural biases in the research model. This would give an overall perspective of the effect of all behavioural biases on investors decisions and thus, have a full representation of the impact of behavioural finance on investors. Finally, the collected data is to an extent dependent on the respondents motive, consent , willingness and fair honesty. Thus, there is a possibility that some of the data may not accurately represent true intentions and thoughts of the respondents.
6.5 Recommendations for Investors
Investors were found to be overconfident in their decisions, however, as explained this leads to excessive risk taking. Thus, it would be advisable for investors to use their confidence in more appropriate way in order to effectively utilize their knowledge and be more rational while investing, thus preventing excessive risk taking. Additionally, during uncertainty, overconfidence can be help investors to effectively forecast the market, therefore can be very useful if used wisely. Other than overconfidence, herding is also positively related with investors decisions. Instead of following the decisions of others, investors may look to undergo educational courses in regards to investing or base their decisions on reliable information in order to be able to better manage their investment choices and limit their risks. Moreover, it would be advisable for investors to limit their thinking of feeling regret when investing in order to not end up holding losing stocks for too long. This is too risky and it will most certainly negatively affect their performance. In contrast, since loss aversion has a negatively impact on investors decisions, it would be recommended for investors to carefully consider their investment choices, but should not feel bad about prior losses because this will negatively affect their psychology and may limit their will to take a chance in potentially good stocks.
6.6 Recommendations for Further Research
For future research it would be better to incorporate a larger sample with a more diversity of investors. For example, further studies could be conducted by collecting a sample of respondents from all UK cities. This would accurately represent the whole 43 phenomenon of the decisions made by UK investors and thus, can confirm the findings of this study. Further research could be conducted by combining several types of investors such as institutional (hedge funds, mutual funds, investment advisors) and individual investors in order to identify the differences in their behaviour and how psychological biases impact their decisions to take risks. This would further help to examine the appropriateness of employing behavioural finance for all types of security markets with all types of investors. Additionally, since behavioural finance is a relatively new and large area of finance and there are several other behavioural biases that must be examined. For instance, anchoring, gambler’s fallacy and availability bias are all psychological factors that can be researched in order to further diversify the examination of behavioural biases on investors decisions making. Such biases may also prove to be vital determinants regarding the risk taking desires of investors. Finally, the results of this study will assist policymakers and stock market regulators in understanding the role that behavioural biases play on investors decision making. Thus, once the necessary policies are implemented in trying to reduce the effect that psychological biases have on investors, then further research can be conducted in order to assess the usefulness of these implemented policies in making the UK stock market a more efficient one.
It can be concluded that the behavioural factors used in this study all had a significant impact on investors decisions in terms of risk taking, which means this study was effective in achieving its overall purpose. Four out of the five biases namely, overconfidence, representativeness, regret aversion and herding have a positive effect on investment decisions meaning that they are causes that increase investors willingness to take risk. On the other hand, loss aversion was found to have a negative effect on investment decisions, therefore, causes investors to take less risks. Out of all biases herding was found to have the greatest effect on investors decisions, followed by loss aversion, then overconfidence, then regret aversion and finally representativeness. Demographic factors such as gender, age, experience and 44 education were all found to have insignificant effect on investors decisions in terms of risk taking.