International Journal of Research Publication and Reviews, Vol 6, no 1, pp 5440-5443 January 2025
International Journal of Research Publication and Reviews
Journal homepage: www.ijrpr.com ISSN 2582-7421
A Study on the Influence of Loss Aversion on Investment Decisions
among Gen Z
Allwin Christopher1, Dr. Cherian Thomas2
1
M.COM FA Student, Kristu Jayanti College (Autonomous), Bengaluru,
[email protected]2
Assistant Professor, Kristu Jayanti College (Autonomous), Bengaluru.
ABSTRACT
This study explores the impact of loss aversion on investment decision-making among Gen Z investors. Behavioral finance suggests that psychological biases, such
as loss aversion, play a crucial role in shaping investment choices, often leading investors to prioritize avoiding losses over potential gains. Using an empirical
approach, data was collected from 100 investors in Bangalore through a structured questionnaire. The study employs ANOVA and correlation analysis to examine
the relationship between loss aversion, risk perception, and financial decision-making. The findings indicate that while loss aversion is prevalent across different
demographics, income levels significantly influence the extent of this bias. Investors with lower incomes exhibit stronger loss aversion, leading to conservative
investment behaviors. Additionally, Gen Z investors are highly influenced by social media and external financial information, which can create uncertainty and
hesitation in investment decisions. The study concludes that while loss aversion can lead to cautious investment strategies, it is essential for Gen Z investors to
balance risk management with growth opportunities to optimize their financial outcomes
1. INTRODUCTION
Behavioral finance, a subset of behavioral economics, suggests that the financial behaviors of investors and professionals are influenced by psychological
factors and biases. These biases can explain various market analyses, particularly those affecting the stock market, such as rapid fluctuations in stock
prices. Because investing involves behavioral finance to such a large extent, the Securities and Exchange Commission employs experts specializing in
this field. There are multiple perspectives from which behavioral finance can be analyzed, but it is generally understood that psychological factors play a
significant role in shaping market outcomes, especially when considering stock market returns. Behavioral finance seeks to understand why people make
specific financial decisions and how those decisions influence markets. As such, behavioral finance has been classified into several categories.
In the realm of behavioral finance, it is assumed that participants in the financial system are psychologically influenced, with tendencies that are typically
normal and self-regulated, as opposed to being fully rational and self-controlled. An investor's physical and emotional health often plays a pivotal role in
their financial decisions. A change in an investor’s mental state often mirrors shifts in their overall health, which in turn affects their capacity to make
sound financial decisions. One of the key findings in behavioral finance research is the impact of biases, which can be attributed to several causes. Broadly
speaking, biases fall into five major categories. Recognizing and classifying these biases is crucial when examining or assessing outcomes within specific
sectors or industries.
2. REVIEW OF LITERATURE
Muskaan Arora and Santha Kumari (2015): In their 2015 study, the researchers examined the impact of age and gender on investors' risk-taking abilities
and the role of loss aversion and regret in investment decisions. They found that investors' risk tolerance was influenced by their feelings of regret and
loss aversion, which served as intermediary variables in decision-making.
Soosunghwang and Steve E. Satchel (2010): The authors studied loss aversion as a behavioral bias in the financial markets of the United States and the
United Kingdom, using an asset allocation problem. Their findings revealed that investors in these markets were significantly influenced by loss aversion,
particularly during bull markets, and that they were more sensitive to losses during these periods compared to bear markets.
Kiran Aziz Malik et al. (2017): This study explored the presence and effects of behavioral biases such as overconfidence and loss aversion among
investors in the Islamabad Stock Exchange. The researchers found that while overconfidence and loss aversion had a significant impact on individual
investors, risk perception did not play a mediating role in the relationship between behavioral biases and investment outcomes.
International Journal of Research Publication and Reviews, Vol 6, no 1, pp 5440-5443 January 2025 5441
Lee and Yulia (2016): This research investigated how loss aversion in visually impaired investors influenced their decision-making processes regarding
investments. The study found that loss aversion was positively correlated with portfolio restructuring, and that narrow loss aversion was a significant
factor in the decision-making process of individual investors.
Jacob Niyoyitamahina et al. (2017): The researchers studied the influence of loss aversion on investors’ choices at the Rwandan Stock Exchange. Their
findings concluded that loss aversion significantly affected the decisions made by individual investors in this market.
3.1 STATEMENT OF THE PROBLEM
Traditional finance assumes that investors are rational, making investment decisions based on comprehensive market information. However, behavioral
finance has shown that investors are often influenced by psychological biases, which challenges the notion that investment decisions are solely based on
rationality. This study aims to explore the effect of loss aversion on the investment decisions of individual investors and to assess the role of risk perception
in investment decision-making using a questionnaire.
3.2 OBJECTIVES OF THE STUDY
• To ascertain how loss aversion affect investor decision-making.
• To study the influence of loss aversion bias on investors' perceptions of risk
3.3 RESEARCH METHODOLOGY
The study is empirical in nature. Empirical research is research that is based on observation and measurement of phenomena, as directly experienced by
the researcher.
3.4 COLLECTION OF DATA
The primary data has been collected from investors in Bangalore. To collect the data, a survey has been conducted with the help of a well-structured
questionnaire. The questionnaire considers demographic factors, risk factors, and the amount of risk they are willing to take during investment decisions.
3.5 SAMPLE DESIGN
The study employs convenience sampling as the sampling method, selecting respondents based on their availability and willingness to participate. A
total of 100 investors were surveyed to gather insights into their investment behaviors and the impact of loss aversion on their financial decision-making.
The primary data was collected through a well-structured questionnaire, designed to assess demographic factors, risk perception, and investment
preferences. This approach ensures accessibility to relevant participants while facilitating an in-depth analysis of behavioral finance trends among Gen Z
investors
3.6 RESEARCH INSTRUMENT
The collected data analyzed with the help of various financial tool like
• ANOVA
• Correlation
4.DATA ANALYSIS
4.1 TABLE SHOWING DATA ANALYSIS BY ANNOVA
Sum of df Mean F Sig.
Squares Square
Between Groups 5.653 3 1.884 2.225 .090
the fear of losing money influence
Within Groups 82.130 97 .847
in investment decisions
Total 87.782 100
rate of perception of risk in Between Groups 1.990 3 .663 .844 .473
investment portfolio Within Groups 74.637 95 .786
International Journal of Research Publication and Reviews, Vol 6, no 1, pp 5440-5443 January 2025 5442
Total 76.626 98
Between Groups 1.023 3 .341 .662 .577
investment time horizon Within Groups 48.937 95 .515
Total 49.960 98
Between Groups 7.078 3 2.359 2.039 .113
financial risks in investments Within Groups 112.248 97 1.157
Total 119.327 100
Interpretation: The fear of losing money has been tested across different groups. The F-value of 2.225 suggests that there might be some differences
between these groups in terms of the fear of losing money. However, the significance level (Sig.) of 0.090 indicates that this result is not statistically
significant at the conventional threshold of 0.05. Thus, we fail to reject the null hypothesis that there is no difference in the fear of losing money between
the groups. Similarly, the perception of risk has been analyzed across different groups. The F-value of 0.844 and the significance level of 0.473 indicate
that there is no statistically significant difference in perception of risk between these groups. The analysis of willingness to take financial risks reveals an
F-value of 2.039 with a significance level of 0.113. Although the F-value suggests some difference between the groups, the significance level indicates
that this difference is not statistically significant.In summary, based on the provided ANOVA table, none of the factors (fear of losing money, perception
of risk, investment time horizon, and willingness to take financial risks) show statistically significant differences between the groups at the conventional
significance level of 0.05.
4.2 TABLE SHOWING DATA ANALYSIS BY CORRELATION
Correlations
How willing are you to take financial Annual income
risks in your investments?
Pearson
1 .137
Correlation
Sig. (2-tailed) .171
willing to take financial risks in Sum of Squares
investment and Cross- 122.133 14.901
products
Covariance 1.174 .149
N 105 101
Pearson
.137 1
Correlation
Sig. (2-tailed) .171
Sum of Squares
Annual income
and Cross- 14.901 98.520
products
Covariance .149 .975
N 101 102
Pearson Correlation between Annual Income and Willingness to Take Financial Risks:
Correlation Coefficient: 0.137
Sig. (2-tailed): 0.171
N: 102
Interpretation: Similarly, the Pearson correlation coefficient of 0.137 indicates a weak positive correlation between annual income and individuals'
willingness to take financial risks in their investments. The p-value (Sig.) of 0.171 again suggests that this correlation is not statistically significant at the
International Journal of Research Publication and Reviews, Vol 6, no 1, pp 5440-5443 January 2025 5443
conventional significance level of 0.05. Therefore, based on this analysis as well, there is no evidence to suggest a significant relationship between annual
income and willingness to take financial risks. In summary, the correlation analysis reveals that there is no statistically significant relationship between
individuals' annual income and their willingness to take financial risks in their investments. The weak positive correlations observed suggest that there
may be a slight tendency for individuals with higher incomes to be more willing to take financial risks, but this tendency is not strong enough to be
considered significant based on the data provided.
5. FINDING, SUGGESTION AND CONCLUSION
It’s found that loss aversion is there in all age groups and different occupational people but the only thing that makes difference is income, the people
with more income are lesser worried about vice versa with lower income. Lot of information about previous investment which gone to loss, which make
investor always think about loss rather than positive in it. GEN Z is influenced by a lot of investment information and market information by lot of people
in social media and other platforms, this make them struggle to choose right information about investment hence it leads to loss
Gen Z investors may be less willing to take risks with their investments compared to older generations. Fear of experiencing losses could lead them to
avoid opportunities that offer higher potential returns but also come with higher levels of risk. As a result, they may miss out on potentially lucrative
investment prospects. Due to their aversion to losses, Gen Z investors may prefer short-term investment vehicles where the potential for losses is perceived
as lower. They may opt for instruments like savings accounts or short-term bonds, which offer more immediate liquidity and are perceived as less volatile.
Gen Z investors may also consider social and environmental factors in their investment decisions. Investments in companies or funds that align with their
values, such as those focused on sustainability or social responsibility, may be favored due to the perception of mitigating potential losses associated with
reputational or ethical risks. Overall, while loss aversion can lead Gen Z investors to adopt a more cautious approach to investing, it is essential for them
to strike a balance between risk management and capitalizing on growth opportunities. Developing a thorough understanding of their risk tolerance,
investment goals, and the broader market landscape can help Gen Z investors navigate the complexities of investing while effectively managing the
impact of loss aversion on their decision-making processes.
REFERENCES
[1] Baron, R. M. & Kenny, D. A. 1986. The moderator-mediator variable distinction in social psychological research: Conceptual, strategic, and statistical
considerations. Journal of Personality and Social Psychology, 51: 1173–1182.
[2] Beckmann, D., Lutje, T. & Rebeggiani, L. (2007). Italian asset mangers’ behavior: Evidence on overconfidence, risk taking and gender. JEL,
Discussion Papers 358, Retrieved from http://diskussionspapiere.wiwi.uni-hannover.de/pdf_bib/dp-358.pdf.
[3] Bell, D. E. (1982). Regret in decision making under uncertainty. Operations Research, 30, 961 - 981.
[4] Dohmen, T., Falk, A., Huffman, D. & Sunde, U. (2007). Are risk aversion and impatience related to cognitive ability? IZA Discussion Papers 2735,
Institute for the study of Labor (IZA). Retrieved from http://ftp.iza.org/dp2735.pdf.
[5] Dwyer, P.D., Gilkeson, J.H. & List, J.A. (2002). Gender differences in revealed risk-taking evidence from mutual fund investors. Economics Letters,
76, 151–158
