"What variables affect investment decisions? | Motilal Oswal"

variables affect investment

The choices that people make in their lives, especially about what to eat, to buy, whom to meet, what to watch, etc, to a large extent, are made due to social media. And what is social media really, if not peer influence? Some would call it peer pressure. The segment of investment isn’t far away from this phenomenon, especially as you’ll find in the stock market today. You’ve doubtless heard of the good old “hot stock pick”. That’s a peer influencing you to buy a particular stock. It may seem like a gentle nudge, but it’s plain peer pressure. 

In 2014, a study by Florian Ederer very aptly elucidated how individuals’ financial decisions are swayed by social media. In other words, how other individuals influence us through channels of social media and thus, peer pressure. According to Ederer, there exist two channels of influence - one is “social learning” and the other, “social utility”. Whether it is to do with online trading, or any other financial decision, these two channels of influence determine how peers may have a say on how we behave while making financial decisions. 

Peer Control

One of the channels, the social learning channel, is purely observational. If you hear that your friend wishes to buy a specific asset, it makes you think of the asset as a high quality one, because you implicitly trust your friend’s judgement. Consequently, you end up buying the asset. Similarly, if you think highly of your friend who suggests you open a Demat account, you’ll go right ahead. 

The other channel, that of social utility, on the other hand, is what you commonly refer to as ‘keeping up with the Joneses.’ If your friend purchases an asset, you may not focus on the quality of the asset per se. However, you may worry that your peer possesses the asset and you don’t. You are concerned about lagging behind with regard to wealth. If the value of the asset shoots up, you think of the fact that your friend will be richer and you will be poorer. That makes you feel less of a person compared to your friend and ultimately, you buy the asset. This is the case when you see your friend engage in online trading, and rush to do the same. If your friend’s behaviour lowers your self-esteem, this can be a huge factor to make you model your friend’s behaviour. 

Behavioural Finance

When you think of peer pressure, it's no surprise that the choices of peers and friends look a lot like your own. In the field of behavioural finance, the effects of peer influence have been studied in different categories. Especially where investment decisions are concerned, people tend to rely more and more on their peers and their choices, rather than their own. Although the broad reasons for following peer behaviour have been mentioned through the Ederer study, there are some aspects of peer pressure to note:

  • You may just emulate your peer’s behaviour more if you believe that your peer has some important quality attached. For instance, if your peer, whose opinion you “value”, is the CEO of a company, you may automatically, as if by reflex, copy their behaviour. You value someone’s opinion as the person is viewed as having some credibility. In this case, you are sure that the decision you take cannot be wrong. 
  • Modelling your peers is an easy way out. In other words, instead of doing the research, say, if you wish to go in for a mutual fund investment, you can just ask your peer who has the same investment for advice. This will compel you to invest. In case your friend advises you to keep away, you will be propelled in that direction. 

Value Your Own Research

Whether you wish to invest your wealth in fixed instruments or different asset classes, there is a varied range of investments out there. The segment of investments is filled with options that suit the requirements of any individual and their goals. Hence, if you wish to make wise investment choices, you have to consider the following:

  • Listening to peers does not help, and it may do harm. Your investment decisions should ideally be based on your own financial goals, and the time span in which you wish to achieve these. Financial goals are unique to each individual. Therefore, you cannot rely on someone else’s choices to meet your own needs.
  • You have your own budget, and this may not be the same as your peer’s. The amount of wealth you wish to allocate may be very different from that of your peers.
  • Investing is a risky business at times, especially if you are trying the stock market today. In fact, the stock market is the place where most peer influence can be seen. For any investment instrument that you wish to allocate your wealth to, there may be low or high risk involved. Investment in any instrument is based on an investor’s tolerance for risk. While your peers may be confident risk-takers, you may not be. Hence, all investments are not the right ones for all folks.
  • It makes sense to do your own research of the investments that you think may suit you. This is the only logical way to make decisions that are closer to correct. You may be confused when you start, because of the plethora of instruments out there, but patience and careful study will lead to the right choice. 

The Investor Comes First

If you are about to open a Demat account and are looking forward to investment in the stock market today, you should evaluate the companies whose stock you may want to invest in. Similarly, you may be looking at fixed income instruments to play it safe. You should check out interest rates and select the investment product that suits your needs. Also, you should assess your goals, not just in terms of the returns you want, but also whether you want gains in the short or long term. Instead of a peer, you would rather put your faith in a broker who is an expert in the investment arena, Motilal Oswal 

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