ESRC funded project: decision-making of retail investors

The Economic and Social Research Council (ESRC) awarded two researchers from the Henley Business School a grant worth around £0.5 million for a four-year project that investigated the financial decision-making of retail investors.

The research team, comprising Professors Chris Brooks (ICMA Centre) and Carola Hillenbrand (The John Madejski Centre for Reputation), examined in detail the process by which retail investors in the UK make financial decisions via independent advisors, focusing on the effects of investor cognitive and emotional biases in the decision-making process and the possible consequences thereof.

It is widely believed that that the financial markets are becoming ever-more complex with an increasing array of potential investments to choose from, and following changes announced in the UK budget in 2014, investors have been given new powers to withdraw their pension savings which can then be spent or self-invested as they choose. At the same time, in the aftermath of the global financial crisis of 2008-09, the returns on most savings products and government bonds plummeted to extremely low levels. Thus the chances to make high returns with low risk appear to have evaporated and all of the above factors have combined to engender a situation where the ramifications for investors who make poor financial choices are at historically unprecedented levels.

Many retail investors make financial decisions following a meeting with an intermediary such as an independent financial advisor (IFA) and the completion of an attitude to risk questionnaire. This project will involve three studies, the first of which will employ a large database of responses to such questionnaires to examine the demographic and other factors that affect risk tolerance. A second study will take place in the setting where IFAs meet with their clients, and will evaluate the impact of the way that information is presented and the effect of their emotional state on the investments that they select. The final study will further investigate the issues raised using lab-based experiments under controlled conditions.

Professor Brooks said, “I am delighted that the ESRC have agreed to fund this research, which I hope will make a valuable contribution to our knowledge of how investors make financial decisions. Retail investors have been largely ignored in the existing academic literature, leaving policymakers lacking a firm knowledge-base, and this grant will enable us to provide evidence in this important field. The findings of the project will contribute to knowledge and potentially improve the financial advisory process for hundreds of thousands of members of the investing public.”