One of the world’s top behavioural finance experts, Professor Dr Thorsten Hens is running an on-going international study into time preferences and risk attitudes in order to establish whether financial decisions and stock market returns have a cultural dimension. Today Prof Hens visited Luxembourg to present findings from the study, based on the responses from 45 nations.
Professor Dr Thorsten Hens of the University of Zurich presented findings from the ‘International Test of Time Preferences and Risk Attitudes’ (INTRA) – a study that he has co-authored with leading financial academics from around the world. To date, 45 nations have participated in the survey which indicates that – despite the increasing interconnectedness of global markets – local cultural differences continue to exert an influence on investment behaviour and returns, meaning that some nationalities are more likely to invest successfully than others.
“More than 120 separate academic studies have shown that value investing consistently delivers more alpha than other strategies, long term. But not everyone is temperamentally suited to this approach.
In an era of global trading where any investor can invest in any market, traditional finance contends that local culture should have no influence on investment decisions or market returns. However, Professor Hens gives two reasons why we should question this. First there is the ‘home bias’ which shows that investors are likely to invest the majority of their assets in their domestic market. Second is the fact where a company has a listing on two exchanges, the trading price for its shares is more likely to be driven by information coming from the domestic market.
Why look at time preferences and risk attitudes?
Comparing different reactions to stock market volatility, Professor Hens observes that ‘Emotional’ investors are most likely to buy high and sell low. This is because they lack a strategy, are strongly influenced by short-termism and can’t bear to lose money. In sharp contrast value investors follow a strategy of buying heavily discounted stocks (relative to the real value of the company if sold as a going concern). Deliberately buying at a discount enables the value investor to get closer to the ideal of buying low and selling high.
Huge volumes of academic research conclude that value investing is a strategy that consistently delivers superior long term returns. But it’s by no means a comfortable strategy to follow because, while it focuses on individual stocks, it is not immune to the movements of the market as a whole. Value stocks offer excess returns when markets rise but are often punished more during market downturns. To be a successful value investor requires patience and a high threshold of loss tolerance.
“More than 120 separate academic studies have shown that value investing consistently delivers more alpha than other strategies, long term. But not everyone is temperamentally suited to this approach,” says Professor Hens.
“The two attributes required above all are patience and loss tolerance. The Intra study shows us that the Nordic and Germanic cultures are best suited to value investing in terms of their patience and that Anglo Saxon cultures will accept the highest losses. Least likely to be successful value investors are the African and Eastern European cultures.”
“Having found these cultural differences between the various countries, it is then interesting to consider John Nash?s „equilibrium perspective?. If fewer people are chasing value stocks in these emerging market nations, it means that higher potential value premiums are available for patient and loss tolerant investors from other nations. Thus the ideal investment product would be a Value fund investing in Emerging Markets and sold to Germans, Scandinavians and Anglo-Saxons.
