CC BY
16
William Branham Kivele
Samara University, Samara, Russia
Countries and culture in behavioral finance
Abstract. Behavioral finance has made important contributions to the field of investing by focusing on the cognitive and emotional aspects of the investment decision-making process. Although it is tempting to say that people are the same everywhere, the collective set of common experiences that people of the same culture share will influence their cognitive and emotional approach to investing. In this article, the author discusses the many cultural differences that may influence investor behavior and how these differences may influence the recommendations of a financial advisor. I have asked several questions as I explored similarities and differences among people of various countries: Do propensities for risk, regret, and maximization vary by country of origin? Do they vary by gender and age? Do levels of trust and happiness vary by country? And the final question is whether the differences matter if a manager is working only with clients in Russia. The questions relate to behavioral finance, which is the description of perceptions and behavior of people facing financial choices. In particular, behavioral finance helps describe the effect of those choices on individuals, their families, companies, and markets and then offers prescriptions for better choices. Key words: finance, culture
For citation: William Branham Kivele Countries and culture in behavioral finance // Humanitarian scientific journal. 2021. №3. pp 30-36
This is an open access article distributed under the terms of Creative Commons Attribution License (CC-BY 4.0).
CULTURE REALLY MATTERS
People are affected by their cultures and experiences.
I was in Burundi, Rwanda, Zambia, Tanzania in 2016 earlier speaking to investment professionals, and as I was preparing for my trip, I was thinking about how I should adapt materials I use in Russia to reflect differences between Russia and Africa. One voice in me said that people are the same all over the world, similar not only in physical features but also in cognition and emotions. So, no need exists to adapt my materials. But another voice reminded me that people in different countries are often placed within different cultures that affect perceptions, expectations, cognition, and emotions. I was reminded of coming to Samara from Kinshasa to study for my Master at Samara National Research University. I was struck by differences between the culture I knew from life in DRC and the culture in the Russia. For example, while sitting in a train I overheard one man saying to another, "I told my daughter that I would support her through college but she is on her own afterward." I was astonished. The culture I knew in DRC was one in which parents continue to support their children long after college. Indeed, it was common for parents to give children sizeable amounts to buy a condominium when they got married. (Mortgage loans were quite limited in DRC at the time, available only to cover relatively small portions of the price of a condominium.)
So, as I was planning my visit to Kenya, I wondered how people in Africa are different from people in Russia. How have their experiences shaped their
perceptions, and are their perceptions different from those of people in the Russia? Africa broke away from the round table in Berlin 1884, now although many older people found it hard to adjust to life under capitalism, younger people adapted quickly. The investment professionals I met were typically in their late 20s or early 30s. Moreover, the people of Africa also have constructed a brand-new savings and investment system that might well be better than that in Russia.
In "Does Culture Affect Economic Outcomes?" Guiso, Sapienza, and Zingales (2006) defined culture as "those customary beliefs and values that ethnic, religious, and social groups transmit fairly unchanged from generation to generation." Culture matters, and it is persistent. In "Cultures of Corruption: Evidence from Diplomatic Parking Tickets," Fisman and Miguel (2006) examined whether diplomats took advantage of immunity from prosecution to park wherever they wanted in New York City and not pay parking fines. They found that diplomats from some countries took advantage of their positions but others did not. Diplomats from Kuwait, for example, accumulated 246 tickets per diplomat during 1997-2002, but diplomats from the United Kingdom, the Netherlands, Australia, and Norway accumulated no parking tickets whatsoever. Even more interesting is that the number of parking tickets per diplomat was generally higher in countries where corruption levels are higher. It seems that people import norms from the culture they know into their new surroundings.
Trust is one aspect of culture. A commonly used question about trust asks, "Generally speaking, would you say that most people can be trusted or that you cannot be too careful in dealing with people?" Guiso and his colleagues (2006) found that immigrants to the United States bring cultural norms of trust from their countries of origin. Those who immigrated into the United States from less trusting societies tend to be less trusting even when they live in the United States. Moreover, in "Trusting the Stock Market" (2007), Guiso and his colleagues found that people who are generally trusting are more likely to invest in stocks than people who are not.
In an earlier study, "Local Ethics in a Global World" (2007), I asked a question about perceptions of fairness of insider trading based on a notable 1998 Supreme Court decision. In my question, "Mr. William" is a partner in a law firm who overhears other lawyers at his firm discussing a merger they are working on. Acting on the information, he buys shares in the target company and profits from the merger. Is his behavior completely fair, acceptable, unfair, or very unfair?
I asked this question of professionals in eight countries. Insider trading is unlawful in each. Table 1 shows the results. In Russia, only 5 percent of professionals said Mr. William's behavior is completely fair or acceptable. But in other countries, a higher percentage thought the behavior was fair—for example, 16 percent in Zambia, 43 percent in Tanzania, and 56 percent in
Burundi. The point is that societal norms and perceptions of fairness vary from country to country.
Table 1. Perceptions of the Fairness of Insider Trading by Finance Professionals in Eight Countries
Who Rated Bond's Behavior Completely Fair or Acceptable_
Country Percentage Rank
Turkey 56 1
India 49 2
Italy 43 3
Tunisia 41 4
Australia 16 5
Israel 16 6
Netherlands 5 7
United States 5 8
FINDING THE DIFFERENCES
To explore the role of countries and culture in financial decisions, I conducted a survey in 10 countries with the help of colleagues in each country. The respondents were university students, and the sample size was large. Altogether, more than 4,000 people participated in the surveys, and although the numbers varied by country, each country was represented by no less than 100 people. I begin by discussing some of the questions on the survey and then present the emerging patterns.
The first question of the survey focused on the propensity for risk when lifetime income is at stake: Suppose you are the only income earner in the family, and you have a good job guaranteed to give you and your current family income every year for life. Now you are given an opportunity to take a new and equally good job. The new job has a 50/50 chance to increase by 50 percent your standard of living each year during your lifetime. However, the new job also has a 50/50 chance to reduce by X percent your standard of living each year during your lifetime. Circle the maximum X percent reduction in standard of living you are willing to accept.
The possible answers ranged from 3 percent to 30 percent. Many investor questionnaires about risk have multiple questions that do not get to the main issue about risk. Risk is not a matter of whether one is concerned about volatility or whether one would gamble with $1,000, because that amount is a lot of money to some people but very little to others. Time horizons also vary from person to person and are not always captured in risk questionnaires. A young person has many years to recover a $1,000 loss, but an older person has fewer years. The question I asked is about lifetime income, a substantial and concrete amount for each person but one that varies from person to person. Moreover, the question
asks about a lifetime horizon that varies from person to person but is concrete to each.
I also asked a second question identical to the first except that it focused on replacing an investment portfolio rather than changing a job. In analyzing both questions, I included only people born in the country where they are residing and excluded foreign students and others whose culture might be different from the predominant culture of a country.
The results, shown in Table 2, average the responses of men and women with equal weight because the ratio of men to women in my sample varies among the countries. The average in the United States for the lifetime income (job change) question was 10.61 percent, which means Americans are willing to "gamble" on their lifetime income only if the upside (50 percent increase in the standard of living) is approximately five times larger than the 10.61 percent downside in the standard of living. China and Vietnam were the most willing to take risk, and Germany and Switzerland were the least willing.
I found that in every country, with the exception of Tunisia, people are willing to take more risk with their portfolio than with their income. This might seem odd because the stakes in the two questions are the same (50 percent standard of living upside and X percent downside), but the ideas of behavioral portfolio theory explain the difference in the responses. Investors tend to think about their money in layers, and job income makes up the bottom layer, the safe money that is delivered every two weeks or every month. Portfolio wealth is in a layer above job income. One can fall back on job income if portfolio wealth is diminished.
Table 2. Propensity for Taking Risk in Income and Portfolio of Investors in Various
Countries
Country How Much Downside How Much Downside
in Income Are You Willing in Portfolio Are You
to Accept for a 50/50 Willing to Accept for a
Chance of a 50% Upside? 50/50 Chance of a 50% Upside?
China 15.56 17.06
Kenya 13.40 15.92
Tanzania 11.48 13.98
Cameroun 13.45 11.48
United States 10.61 12.61
Japan 9.72 12.41
France 10.33 11.93
Russia 9.74 11.74
United Kingdom 9.58 11.64
DRC 10.95 11.40
Tunisia 10.64 10.33
Table 3 shows the average scores for each country's responses to additional questions in the study that go beyond risk. Each score is a mean of men and women and includes only people born in the country where they are residing. I asked about the propensity for regret, which is sometimes confused with risk.
Whenever I make a choice, I try to get information about how the other alternatives turned out and feel bad if another alternative has done better than the alternative I have chosen. Rate your level of agreement with this statement on a scale from strongly disagree to strongly agree.
The propensity for regret was highest in China, Kenya, and DRC and Russia lowest. I asked about the propensity for maximization: "I always want to have the best. Second best is not good enough for me. How much do you agree with this statement?" Respondents in Russia and DRC agreed the most with this statement, and those in Kenya and China agreed the least.
I then explored levels of happiness by asking the respondents to rate their level of satisfaction with their life on a scale of 1 to 10. People in the United States, France, Tanzania, and Norway rated their satisfaction the highest. People in DRC, Russia, and Tunisia rated their satisfaction the lowest.
Finally, I asked a question about trust but modified the usual question to exclude family members: "Generally speaking, would you agree that most people can be trusted or that you always have to be careful in dealing with people other than your family?" China ranked the highest in agreeing that most people can be trusted. I was surprised by this result until I learned that China's social structure is based on a network of not only family but also friends and associates who might provide links to other associates who do favors for one another. For example, if people need something from a government agency, they will find someone in their network who knows someone at the agency who will help them.
Table 3. Propensities for Regret, Maximization, Happiness, and Trust
Country Regret Maximization Happiness Trust
Brazil 5,92 5,36 6,87 4,08
China 4,58 4,45 6,26 5,98
France 6,00 5,38 7,84 4,52
Germany 5,77 5,36 7,12 4,52
Holland 5,98 6,37 7,88 5,89
Japan 5,73 5,04 6,12 5,17
Russia 6,63 6,65 6,04 4,56
Norway 5,57 5,61 7,86 5,39
DRC 5,76 5,70 7,64 4,75
Taiwan 5,81 4,91 6,59 5,76
Tunisia 5,87 6,80 6,71 4,33
United Kingdom 5,89 6,22 7,30 5,02
United States 5,98 6,24 7,95 5,69
Note: Higher numbers imply higher propensities for regret and maximization and higher levels of happiness and trust.
RELATIONS BETWEEN THE VARIABLES
The willingness to take risk with both income and investment portfolios is significantly correlated. This is true for both men and women. People who are willing to take risks with their income are generally also more willing to take risks in their portfolio. The only other variable that is consistently related in a significant way to the propensity to take income and portfolio risk is trust. Trusting people are not only more willing to invest in stocks, as Guiso and his colleagues have found, but also are more willing to take risk.
The differences in the scores between men and women are shown in Table 4, which includes the responses of all the men and women from all the countries in the survey. Men are more willing than women to take risk with their income and portfolio, and the differences are statistically significant. Men and women are about equal in their susceptibility to regret. Men score higher on maximization, but women are happier. Finally, women are less trusting than men.
PATTERNS IN THE DATA
One idea from behavioral portfolio theory is that investors divide their money into layers, with some money for downside protection and some money for upside potential. So, people who aspire for the upside are willing to take more risk than people with no such aspirations. Poor people buy more lottery tickets relative to their income than rich people because their aspirations are high relative to their current situation. The ratio of desire for upside potential and downside protection varies by country. I find that people in lower income-per-capita countries are not as happy as people in higher income-per-capita countries and have a higher propensity for risk. I attribute it to greater desire of people in lower income-per-capita countries to move up relative to the desire of people in higher income-per-capita countries. Another difference among cultures occurs along the individualism-collectivism line, investigated by Geert Hofstede. In individualistic societies, ties among individuals are loose and all are expected to look after themselves and their immediate families. In collectivistic societies, individuals are integrated into strong cohesive in-groups, generally extended families who protect one another in exchange for unquestioning loyalty.
Table 4. Differences in the Propensities between Women and Men: Women Are Less Willing to Take Risk, have a Lower Propensity for Maximization, Are Happier, and Are Less Trusting
Women Men Difference Is the Difference Statistically Significant?
Risk tolerance 10,72 11,99 -1,27 Yes
in income
Risk tolerance 12,61 14,39 -1,78 Yes
in portfolio
Regret 5,49 5,53 -0,04 No
Maximization 5,53 5,69 -0,16 Yes
Happiness 6,80 6,68 0,12 Yes
Trust 4,95 5,15 -0,20 Yes
CONCLUSION
The reasons for differences in the propensity for risk among people of different countries are varied. People in low-income countries have high aspirations relative to their current income. But it is not that they like risk. Rather, they pay with risk for a chance to move up in life. People in collectivistic countries can afford to take more risk because their in-groups provide downside protection.
The propensities for risk, regret, and maximization vary by country of origin and by gender. Levels of trust also vary. Risk tolerance in income and portfolios is related, and risk tolerance is related to trust. Trusting people are willing to take more risk. Financial advisers should consider clients' countries of origin when educating and advising them. An awareness of the culture that clients come from is important, and that insight will allow advisers to serve their clients well. Cultures vary, and culture matters.
REFERENCES
1. Fisman, Ray, and Edward Miguel. 2006. "Cultures of Corruption: Evidence from Diplomatic Parking Tickets." NBER Working Paper 12312 (June).
2. Guiso, Luigi, Paola Sapienza, and Luigi Zingales. 2006. "Does Culture Affect Economic Outcomes?" Journal of Economic Perspectives, vol. 20, no. 2 (Spring):23-48. 2007. "Trusting the Stock Market." CFS Working Paper 2005/27 (May).
3. Hofstede, Geert. 2001. Culture's Consequences: Comparing Values, Behaviors, Institutions and Organizations Across Nations. 2nd ed.
4. Thousand Oaks, CA: Sage Publications.
5. Hsee, Christopher K., and Elke U. Weber. 1999. "Cross-National Differences in Risk Preferences and Lay Predictions." Journal of Behavioral Decision Making, vol. 12, no. 2 (May):165-179.
6. Statman, Meir. 2007. "Local Ethics in a Global World." Financial Analysts Journal, vol. 63, no. 3 (May/June)
