Understanding the influence of investors' risk perception on investment decision-making in South Africa’s financial markets

Abstract

This study investigates the factors influencing investment decision-making within South Africa's financial markets, focusing on psychological, demographic, and external market elements. Drawing from Prospect Theory, the research reveals a deviation from traditional behavioral assumptions, highlighting that external market dynamics, rather than individual risk perceptions or demographic traits, predominantly guide investor behavior. Using a quantitative cross-sectional design, data were collected through structured questionnaires from 120 randomly selected South African investors aged 18 and older with market experience. Structural equation modelling assessed factors influencing risk perception and subsequently, investment behavior. The findings demonstrate that market-related variables significantly influence risk perception (? = 0.653, p < 0.001) and decision-making, aligning with the Efficient Market Hypothesis. In contrast to Prospect Theory's expectations, risk perception had no significant direct effect on investment choices (? = -0.009, p = 0.933). Cognitive biases and emotional influences exerted a moderate impact, while demographic characteristics, including gender, education, and experience, showed minimal influence on investment decisions, suggesting that practical market experience outweighs formal training. With robust construct validation (CR = 0.711 to 0.951), the study enhances the reliability and credibility of the findings. It highlights global regulatory frameworks as crucial for investor confidence. These results contribute to behavioral finance literature and support practical implications for policy, market transparency, and investor education. Future research should consider diverse populations and qualitative investors' perspectives.

Keywords: {'name': 'Risk Perception, Investment Decision-Making, Market Dynamics, Cognitive Biases, South African Financial Markets.'}

Authors & affiliations

Bosede Olatomi Ige
Affiliation not supplied

Stanley Chibuzor Onwubu
Affiliation not supplied

Deposited references

Supplied references, not a list of publications citing this article.

DOI: 10.1108/AJAR-09-2020-0086

Ahmad, G. N., Warokka, A., & Lestari, I. P. (2020). Financial risk tolerance analysis of Indonesian retail investors. Journal of Financial Risk Management, 9(3), 77-92. https://doi.org/10.4236/jfrm.2020.93005.

DOI: 10.1177/08445621231204296

DOI: 10.1080/23322039.2023.2239032

DOI: 10.58861/tae.grdier.2024.13

Badheka, G. T., & Pandya, K. (2022). Behavioural Capital Structure: A Systematic Literature Review on the Role of Psychological Factors in Determining the Capital Structure. International Journal of Financial Management, 12(3), 01-09. http://publishingindia.com/ijfm/

DOI: 10.2139/ssrn.3846839

DOI: 10.1287/mnsc.2020.3747

DOI: 10.1007/s40822-023-00234-y

Buhai, W., (2021 June 28). Why are Local Equities Surging when the Economy is Spluttering? https://stanlib.com/2021/06/28/why-are-local-equities-surging-when-the- economy-is-spluttering/.

Chaitanya, D. B., & Nordin, N. (2021). The Relationship between Psychological Factors, Risk Perception and Social Media on Investment Decision Making. International Journal of Advanced Research in Economics and Finance, 3(4), 55-72.

Chen, J. (2024, April 01). Prospect Theory: What It Is and How It Works, With Examples. Investopedia. Retrieved from https://www.investopedia.com/terms/p/prospecttheory.asp

DOI: 10.1108/JM2-04-2023-0080

DOI: 10.55493/5006.v12i2.4684

DOI: 10.1016/j.ygyno.2021.04.035

DOI: 10.1186/s40854-020-00198-x

Hemrajani, P., & Sharma, S.K. (2020). Measuring financial risk tolerance: The role of socio-demographic factors under the influence of attitude towards money. IUP Journal of Applied Finance, 26(1), 31-52.

DOI: 10.62019/abgmce.v4i2.105

Karem, A. A., & Azzahra, M. S. (2024). Analyzing the Impact of Regulatory Policies on Financial Stability and Market Dynamics in the Banking Industry. Journal of Banking Regulation. Advance online publication. https://doi.org/[insert DOI when available] Inspirat, 14 (02) (2024) pp. 83-91

DOI: 10.61108/ijsshr.v2i3.144

Kaszowska, J., & Santos, J. L. (2014). The Role of Risk Perception in the Systemic Risk Generation and Amplification: Agent-Based Approach.". ACRN Journal of Finance and Risk Perspectives, 3(4), 146-170.

DOI: 10.1108/ECAM-03-2022-0279

DOI: 10.52711/2321-5763.2023.00045

Mathanika, T., Tharshiga, P. and Yogendrarajah, R. (2018), “Demographic factors and individual investor’s decision making”, European Journal of Business and Management, Vol. 9 No. 15,

Maverick, J.B. (2023, November 02). The Importance of a Client's Risk Assessment. Investopedia. Retrieved from https://www.investopedia.com/articles/investing/110213/importance-clients-risk-assessment.asp

DOI: 10.26714/mki.14.2.2024.220-230

DOI: 10.1016/j.qref.2021.06.010

DOI: 10.61397/mfc.v1i3.117

Nasution, E. R. (2023). Investor protection in Indonesia: a legal analysis of securities regulation. International Journal on Social Science, Economics and Art, 13(2), 126-135.

DOI: 10.9770/jssi.2020.9.4(18)

DOI: 10.1016/j.irfa.2018.11.002

DOI: 10.70121/001c.123781

DOI: 10.1016/j.najef.2022.101755

DOI: 10.3126/jbss.v4i1.71135

DOI: 10.1108/IJBM-09-2022-0408

DOI: 10.46281/ijfb.v9i1.1548

DOI: 10.21474/IJAR01/11906

DOI: 10.1177/2394901519825924

DOI: 10.1016/j.euroecorev.2018.01.007

Travis Robson (2023). South African Financial Markets: A Look at the Current State of Affairs by SAIFM.

DOI: 10.1016/j.jbankfin.2024.107293

DOI: 10.1007/s10479-022-05142-z

DOI: 10.1016/j.frl.2023.104102

DOI: 10.54254/2754-1169/114/2024BJ0168