How rational are individual investors: A factor analysis application in Turkey

Abstract

Individuals have generally narrow income and they aim to save and spend money after fulfilling their basic vital requirements of daily life. It is equally important to save money and to assess investments for the individual investors to realize their financial goals. Individuals' savings, directed to financial markets, increase the depth of financial markets and diversify the risks by spreading them to the baseline. Accordingly, individual investors’ investment decisions cause some financial abnormalities and it forces the academic studies to clarify the underlying factors of individuals’ investment decision-making process and their behavioral motivators. This study aims to determine the behavioral factors that affect individual investors’ decisionmaking processes with an empirical application over Afyonkarahisar province in Turkey. The study has been conducted using a survey that contains questions to specify 460 individual investors’ socio-demographic information, financial habits, attributes and how they respond to 35 specific propositions which are derived from Behavioral Finance tendencies. Consequently the participants completely showed and reflected the tendencies of Behavioral Finance such as over optimism, risk aversion, avoiding regret, herding, representative bias, gambling and framing. Besides the Exploratory Factor Analysis technique has been used to convert the numerous variables into a limited number of meaningful and independent factors. Finally new variables named as Affirmation, Hetero-Emotional, Probhecy, Contrast and Adverse Advertisement / Social Circle Tendency