The association between selected demographic variables on investors' expected utility values and risk tolerance

Abstract

The association between selected demographic variables on investors' expected utility values and risk tolerance has been focused on in various countries all over the world. Some demographic variables were found to have an effect on how investors make financial investment decisions in other countries. Their possible effect must be determined within a South African environment. FinaMetrica has a database available in which they store the financial risk tolerance score of investors from all over the world and these scores have been calculated by the answers investors provided to the 25 questions asked in their questionnaire. The database was received from FinaMetrica and the South African investors who completed all the required fields for this research were focused on. It was found that the five major variables to have an effect in other countries are the gender variable, age variable, generation variable, education level variable and income level variable. These variables were identified as supporting variables to the primary theory of this research paper - the expected utility theory. The expected utility theory states that individuals want to maximise the utility they receive from investments. If the factors that affect how individuals make financial investment decisions can be determined, it can assist investors in increasing their expected utility value. Various statistical analyses were done and correlations were investigated and significant associations were found between the identified demographic variables and the financial risk tolerance score of investors. The identified significant relationships were found due to the specific demographic variable having a p-value of less than 1%, which is overwhelming evidence that the null hypothesis (for that specific variable) should be rejected: $H_{0}$ (Variables) : $\beta_{1}$ =0 (There is no significant relationship between the selected variable and financial risk tolerance). From analyses done in this research with identified demographic variables that supports the expected utility theory and financial risk tolerance, it was found that the identified variables support the expected utility theory and that an investors' expected utility can be strengthened by looking at the five supporting demographic variables. The expected utility theory is strengthened by analysing the five identified demographic variables and it will assist investors and financial advisors in making a more informed financial investment decision as an investors risk tolerance would be more accurately determined and will be more reliable for decision making. One of the limitations of this research is that the FinaMetrica database consists of South Africans who have access to technology and, therefore, it is not a good example of the diversity of this country. It is, therefore, recommended that information about the demographics of investors and the way they invest should be obtained. This should be done in such a manner that available information represents the diversity of the South African population. With this information, an additional analysis should be done to determine whether more accurate conclusions can be drawn with regards to South Africa and the effect demographics may have on the way financial investment decisions are made.