Cross-Cultural factors and Portfolio Choice

1. Cross-Cultural factors and Portfolio Choice Daniel Egan, Greg Davies, Peter Brooks Barclays Wealth Behavioural Analytics FUR Conference 01/07/2008

2. Building Individual Portfolios How do we interpret and use variation in behaviour and preferences? Irrational Individual ? Cultural Circumstantial

3. Survey and Dataset Preliminary filter earned equal to or greater than the top 10th local percentile of income earners reported investable wealth equal to twice the top 10th local percentile of income Survey Section I - Demographics Section II - 80 questions relating to investment and personality traits. All questions in Section II were randomised. English in the UK, Singapore, and India Local script in Hong Kong, Taiwan, and China (PRC) • Validation Filter • - Must have taken reasonable time to complete survey • - Must have answered a few questions consistently • not preferring a 5% return over a 20% return or a 15% return. • The total effect was to remove an average 10% of each locations sampled

4. Key Variables

5. Risk Tolerance Risk Tolerance Score Risk Tolerance Profile Have to fix order to be consistent!!

6. Portfolio Choice Which portfolio would you prefer? No large differences across nations “The chart shows the high, low and most likely final values of £12,500 invested in 5 different portfolios for 5 years. For example, in Portfolio 1 you will get £13,500 and in Portfolio 5 you end up getting anything between £7,500 and £34,000, but the most likely amount is £19,000. Which portfolio would you prefer?”

7. The chart shows the high, low and most likely final values of a £12,500 investment in 5 years. Please rate how risky you think this investment is.” Risk Perception How risky is this investment? That depends...

8. Monthly returns Jan 2000 – June 2008

9. Excellent Good Neither bad nor good Poor Terrible Return Expectations Classifying expectations Shows what “good” returns are

10. Predicting Portfolio Choice Bivariate analysis

11. Risk tolerance Portfolio Choices by Risk Tolerance Score Most Risky ** Statistically significant differences in mean portfolio choice across Risk Tolerance Profiles Least risky

12. Risk Perception Mean Portfolio Choice by Risk Perception

13. Higher return expectations do drive riskier choice Cumulative Choice Returns Expectations and Portfolio Choice Cumulative distribution of each returns expectation profile across choices of portfolio

14. Predicting Portfolio Choice Comparative explanatory power

15. Baseline Difference in Portfolio Choice Difference from UK UK SG TW HK CN IN

16. Allow effect of Risk Tolerance to vary Risk Tolerance Intercepts UK SG SG TW TW HK HK CN CN IN IN UK Difference from UK Difference from UK

17. Allow effect of Risk Perception to vary Risk Perception Intercepts UK SG SG TW TW HK HK CN CN IN IN UK Difference from UK Difference from UK

18. Allow different Returns Expectations Intercepts Returns Expectations Mod High Resp UK SG TW HK CN IN Difference from UK

19. All together now! RT RT * RE Intercepts RP Interactions Main Effects Baseline

20. Conclusions • Risk Perception not predictive • Except China – negative! • Returns Expectations are! • Especially when interacted with Risk Tolerance • Controlling for: • Risk Tolerance; • Risk Perception; • Returns Expectations; • Country-specific effects; • Only China maintains base-level difference in portfolio choice • Risk Tolerance always predictive • Singaporeans more sensitive

21. Fin.

23. Social support network effects perceptions, not choices. Risk perception and social support Portfolio choice and social support "If things went wrong financially, I could rely upon the support of my family and friends." "If things went wrong financially, I could rely upon the support of my family and friends."

25. A progression of cultural differences A Similarity index (UK based) reveals an intuitive progression • The more mature the economy and market, the more it resembles the UK • The more dislike the UK, the higher the variance of its measurements • Indicates lack of stability in market expectations and understanding

26. Objective Risk • Possibility of loss • Mass of loss • Maximum loss • * Variance Percieved Risk Social Support Recency Bias Prospective Portfolios Risk/Return Risk Tolerance Risk Preference Affective Appraisal Portfolio Choice • Objective Benefit • * E(X)? • E[U(X)]? • Max(X)? Subjective Benefit * Returns Expectations * E([U(X)] Two models of the investment decision Bottom-up multi-attribute representation allows better comparison of constituent attributes requires reconciliation into single decision node Top-down affective reaction non-compensatory results in transitive preferences Source:

27. Risk Preferences Risk Perception Probabilistic Calibration Trading Behaviour Overconfidence Social network support (Weber and Hsee) Calibration Base-level risk Market Maturity (risk/return trade-off) Utility of Wealth What and why are there cultural differences? Documented Differences Explanation Source:

28. Income Risk Income Risk? Income Risk

29. Risk Tolerance Stable Over Time • 62% of the sample had no change in their allocated Risk Profile over 4 months • No changes of more than 1 Profile • The majority who changed were within 3 points of the profile boundary • The downturn in markets allowed us to test the scales market sensitivity • There was only a minor increase of 1.9% in the “Low” and “Medium-Low” Risk” profiles from June, 2007 Stability Good Risk Tolerance scales are also stable over time, and through market conditions. Risk Tolerance measurements may have some natural variance in them, but not a large amount Testing the Scale Our scales performed extremely well, being stable both across time and changing market conditions. This implies we were measuring a real underlying trait, rather than mood or sentiment Down One No Change Up One Immune to Market Conditions Low Med-Low Moderate Med-High High

30. Return / Volatility Environment

31. Social network support

32. Risk Tolerance across all locations Intercepts UK SG TW HK CN IN UK SG TW HK CN IN RTS

33. Risk Perception Intercepts UK SG TW HK CN IN Risk Perception