How do retail investors make financial decisions?

The question of how retail investors make investment decisions will be closely examined by Professors Chris Brooks from the ICMA Centre and Carola Hillenbrand from Marketing and Reputation at Henley Business School, thanks to a grant of approximately £0.5million from the Economic and Social Research Council (ESRC).

The project will provide new evidence and knowledge on how investors make decisions, to inform and improve the existing financial advisory process for retail investors.

Financial markets are becoming ever-more complex with an increasing array of potential investment products to choose from. Since 2014 investors have new powers to withdraw their pension savings, to spend or invest as they choose.

The returns on most savings products and government bonds have also plummeted since the 2008 recession and remain at extremely low levels.

The chance to make high returns at low-risk levels appears to have evaporated and the ramifications for investors who make poor financial choices are at historically unprecedented levels.

In this climate 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.

Professors Chris Brooks and Carola Hillenbrand will examine how retail investors in the UK make financial decisions when working with independent advisors.

They will also analyse attitude to risk questionnaires to examine the demographic and other factors that affect risk tolerance. The research will also evaluate:

• the impact of the way that IFAs present information to retail investors
• the effect of clients’ emotional state on the investments that they select

The project’s major focus will be around the effects and consequences of cognitive and emotional biases in the investor’s decision-making process.

Professor Brooks, Professor in Finance from the ICMA Centre at Henley Business School 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.”