Exploring the Perceptions and Emotions of U.S. Investors Using
Geographical Diversification as an Investment Strategy
Dissertation Manuscript
Submitted to Northcentral University
Graduate Faculty of the School of Business Management and Technology
in Partial Fulfillment of the
Requirements for the Degree of
DOCTOR OF PHILOSOPHY
by
SAMUEL ANTWI
San Diego, California
January 2017
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Approval Page
Exploring the Perceptions and Emotions of U.S. Investors Using
Geographical Diversification as an Investment Strategy
By
Samuel Antwi
Approved by:
Chair: Vanessa Claus, Ph.D.
Certified by:
Dean of School: Peter Bemski, Ph.D.
Date
ii
Abstract
The Behavioral Finance Theory suggests that investors’ financial decision-making is
influenced by psychological factors. This study was designed to address the problem of
investors’ continued use of the modern portfolio theory (MPT) strategy of geographical
diversification, as an investment strategy, in spite of the evidence that the strategy is not
effective, which results in increased cost, decreased returns, and increased risks. The
purpose of this qualitative single case study was to explore U.S. investors’ perceptions
and emotions regarding their continued use of geographical diversification as an
investment strategy. Ten participants who were at least 18 years old, lived or work in the
Washington D.C. Metropolitan area, and diversify their investments across different
countries participated in this study. Semi-structured interview questions and journaling
were used to collect data from the individual participants. The data was manually coded
into themes for analysis. The study revealed that participants had positive emotional
feeling when using geographical strategy and thought having positive emotional feelings
during investment decision-making would lead to positive investment behavior.
Moreover, participants perceived geographical diversification in real estate and oil
industries on emerging and growing markets helped increase investment returns and
reduce investment risks. The findings of this study are consistent with literature on
behavioral finance theory, as pertaining to participants’ perceptions and emotions about
the use of geographical diversification as a strategy and psychological biases of the
decision making-process. The researcher recommends that investors critically assess their
emotional feelings and regulate those emotions during decision-making in order to make
beneficial investment decisions. Investors should assess the emerging and growing real
iii
estate and oil markets before diversifying their portfolios, on such markets, in order to
increase returns and reduce risks. The researcher recommends that future quantitative
studies should be conducted to evaluate the effectiveness of geographical diversification
on the real estate and oil markets of the emerging and growing countries in Africa, Asia,
Eastern Europe, and South America. Finally, investors should recognize, analyze, and
control their emotional feelings, perceptions, and psychological biases in order to make
increasingly beneficial investment decisions.
iv
Acknowledgements
I am grateful to the Almighty God for granting me the wisdom, protection, and
strength throughout my schooling. I would like to express my sincere appreciation to my
Dissertation Committee Chair, Dr. Vanessa Ann Claus. Without Dr. Claus’ timely
support and guidance, this dissertation would not have come into fruition. I would also
like to acknowledge the invaluable contributions of Dr. Frank Bearden, the Subject
Matter Expert, Dr. Verrill, the Academic Reader, Dr. Joan Saunders, my financial
management specialization professor, and all the professors who mentored me. I will be
forever indebted to Dr. Stephanie Wallio for her motherly support throughout the
dissertation process. I would also like to show my appreciation to my family for their
understanding throughout my academic journey. I want to acknowledge the amazing
support provided by my son, Samuel Antwi, Jr., my mother, Madam Rebecca Boahemaa,
my father, Mr. Paul Antwi of blessed memory, my siblings, and my uncles, Mr. Jonas
Owusu-Banahene and Dr. John Kwabena Kwakye. Lastly, I would like to express
profound gratitude to my friends and colleagues, especially, Nora Frimpong, Anita
Arthur, Gloria Amankwah-Sarpong, and Dr. Christosla Anguelov for their insight and
constructive feedback.
v
Table of Contents
Chapter 1: Introduction ....................................................................................................... 1
Background ................................................................................................................... 3
Statement of the Problem .............................................................................................. 5
Purpose of the Study ..................................................................................................... 6
Theoretical/Conceptual Framework Overview ............................................................. 7
Research Questions ..................................................................................................... 10
Nature of the Study ..................................................................................................... 11
Significance of the Study ............................................................................................ 13
Definition of Key Terms ............................................................................................. 15
Summary ..................................................................................................................... 16
Chapter 2: Literature Review ............................................................................................ 18
Theoretical/Conceptual Framework............................................................................ 19
MPT as an Investment Strategy .................................................................................. 21
Understanding Investor Behavior ............................................................................... 32
Problems and Limitations of the Previous Studies ..................................................... 62
Summary ..................................................................................................................... 65
Chapter 3: Research Method ............................................................................................. 68
Research Design.......................................................................................................... 69
Population/Sample ..................................................................................................... 72
Materials/Instrumentation .......................................................................................... 74
Study Procedures ....................................................................................................... 79
Data Collection and Analysis...................................................................................... 81
Assumptions................................................................................................................ 84
Limitations .................................................................................................................. 85
Delimitations ............................................................................................................... 86
Ethical Assurances ...................................................................................................... 86
Summary ..................................................................................................................... 88
Chapter 4: Findings ........................................................................................................... 91
Trustworthiness of Data……………………………………………………………...91
Results ......................................................................................................................... 92
Evaluation of Findings .............................................................................................. 108
Summary ................................................................................................................... 118
Chapter 5: Implications, Recommendations, and Conclusions ...................................... 121
Implications............................................................................................................... 122
Recommendations for application ............................................................................ 140
vi
Recommendations for future research ...................................................................... 143
Conclusions ................................................................................................................ 144
References ....................................................................................................................... 147
Appendixes ..................................................................................................................... 161
Appendix A: Recruitment Notice on Social Media Network Websites ......................... 162
Appendix B: Recruitment and Screening Email Response............................................. 163
Appendix C: Informed Consent ...................................................................................... 164
Appendix D: Participation Confirmation Email ............................................................. 167
Appendix E: Email Response to Unqualified Applicant ................................................ 168
Appendix F: Participation Waiting List Email ............................................................... 169
Appendix G: Participation not Needed due to Data Saturation Email............................ 170
Appendix H: Interview Questions .................................................................................. 171
Appendix I: Journaling Instructions................................................................................ 173
Appendix J: Journal Template ........................................................................................ 174
Appendix K: Member Validation of Recorded Response Email .................................... 175
vii
List of Tables
Table 1 Theme Surmised from Processing and Analysis of the ResearchQuestion 1…....93
Table 2 Theme Surmised from Processing and Analysis of the Research Question 2…...97
Table 3 Theme Surmised from Processing and Analysis of the Research Question 3….101
Table 4 Theme Surmised from Processing and Analysis of the Research Question 4….105
viii
1
Chapter 1: Introduction
According to Delcoure (2010), Hyoyoun and Wook (2013), and Resnik (2010),
diversification of financial assets across different geographical areas remains one of the
most common approaches employed by financial investors and financial corporations to
maximize investment returns and reduce financial investments risks. The modern
portfolio theory (MPT) assumes that financial investors geographically diversify their
financial assets to maximize returns and minimize risk (Markowitz, 1959; Masron &
Fereidouni, 2010; Resnik, 2010). According to Hyoyoun and Wook (2013), the MPT
approach of financial investment cannot be completely dismissed, despite a lack of
empirical support that the geographical diversification strategy is effective in increasing
returns and reducing risks, which is because financial investors widely utilized the
geographical diversification strategy to manage their investments (Hyoyoun & Wook,
2013). A study conducted to assess the performance of diversified investment assets in
five European Union countries, Denmark, France, Germany, Spain, and the United
Kingdom, showed a decrease in investment returns of geographically diversified assets
compared to domestically invested assets (Bobillo, Iturriaga, & Gaite, 2008). Another
study found that when investors geographically diversified their financial assets, there
was an increase in the unsystematic and total risks of the financial investments (Gocmen,
2010). Unsystematic risks are unplanned investment risks that are unique to the
investment location and not usually common among all investments (Gocmen, 2010).
Examples of unsystematic risks include a strike by employees of a company, drastic
change in management, or political instability (Gocmen, 2010). Total risks are
combination of planned and unplanned investment risks such as changes in interest rate,
2
number of stocks, and political instability (Gocmen, 2010). According to Chu-Sheng
(2010), the use of geographical diversification was not effective in maximizing returns
and minimizing risks in the Japanese financial market due to foreign exchange cost, risks
and transaction costs. Similarly, Cai, Xu, and Zeng (2016) cautioned investors that while
geographical diversification may improve investment returns, the increasing cost of
operating investment across different countries should be taken into consideration.
Understanding how investors make financial decisions is the main interest of
financial researchers. For many decades, financial researchers have utilized conventional
finance theory, which assumes that financial investors make rational investment decisions
(Markowitz, 1959; Masron & Fereidouni, 2010; Resnik, 2010). However, a phenomenon
has developed in which financial investors make irrational investment decisions, contrary
to the conventional finance theory’s assumption that all investors make rational investing
decisions based on accessible information. For example, U.S. investors continue to use
geographical diversification when empirical evidence shows that the strategy is not
effective (Raju & Khanapuri, 2010; Ritter, 2003; Shefrin, 2000, 2007, 2013). The
conventional finance theory has not been able to fully explain why some investors make
irrational investment decisions, describing this as market anomalies (Ritter, 2003;
Shefrin, 2000, 2007, 2013).
The behavioral finance theory assumes that people make decisions based on reallife choices rather than optimal choices and therefore takes into consideration the
investors’ perceptions and emotions in making investment decisions (Kahneman &
Tversky, 1979). Investors’ behaviors have prompted the conventional finance theory
advocates to call the behavior irrational, while advocates of behavioral finance theory
3
describe the behavior as investors utilizing real-life perceptions and emotions in decisionmaking (Kahneman & Tversky, 1979; Ritter, 2003; Shefrin, 2000, 2007, 2013). The
behavioral finance theory has not been applied to understand human factors behind U.S.
investors’ continued use of a geographical diversification strategy to maximize returns
and minimize risks (Hyoyoun & Wook, 2013; Peteros & Maleyeff, 2013).
Background
Historically, investors utilized the MPT strategy of geographical diversification to
increase investment returns and decrease investment risks (Markowitz, 1959; Masron &
Fereidouni, 2010; Resnik, 2010). Numerous research studies support the use of the
geographical diversification strategy to improve investment outcomes and reduce risks
(Hargis & Mei, 2006; Masron & Fereidouni, 2010; Meric, Jie, & Meric, 2016; Mimouni,
Charfeddine, & Al-Azzam, 2016; Odier & Solnik, 1993; Saiti, Bacha, & Masih, 2014;
Solink, 1974; Torres García-Heras, 2011). Studies compared the performance of
domestically diversified products with geographically diversified portfolios regarding
increasing investment returns and decreasing risks. For example, Masron and Fereidouni
(2010) examined portfolio diversification benefits of the housing industry and the
relationship between the housing performance and inflation. Masron and Fereidouni
(2010) found that diversification in the housing industry provided more benefits than
risks and that investment in the housing industry resulted in lowest risk-to-reward ratio.
In another study, Meriç, Jie, and Meriç (2016) examined the performance of diversified
portfolios of investors from the United States, Canada, Germany, the United Kingdom,
and France, as related to their investments within Asian, African, and Middle Eastern
markets. Meric et al. (2016) found that that the U.S. investors could increase their
4
investment returns and reduce their risks by diversifying on the Indonesian, Philippine,
Malaysian, and Thai emerging stock markets. Internationally diversified investments
reduced risks and increased investment outcomes better than the domestically diversified
investments (Hargis & Mei, 2006; Masron & Fereidouni, 2010; Mimouni et al., 2016;
Odier & Solnik, 1993; Saiti, Bacha, & Masih, 2014; Solink, 1974; Torres García-Heras,
2011). Contrary to this, not all studies found these beneficial effects of geographical
diversification strategy. Other findings showed that the strategy did not increase returns
and the investment risk did not reduce (Bobillo et al., 2008; Cai, Xu, & Zeng, 2016; ChuSheng, 2010; Gocmen, 2010; Maldonado & Saunders, 1981; Raju & Khanapuri, 2010;
Singh, Kumar, & Pandey, 2010). The findings that the geographical diversification
strategy was not effective in increasing returns and reducing risks indicates that the
beneficial effects of the strategy had either significantly been reduced or totally
eliminated (Raju & Khanapuri, 2010; Singh, Kumar, & Pandey, 2010). The researchers
attributed the ineffectiveness of the strategy to the globalization of the financial markets
over time.
For many years, researchers assumed that financial investors made rational
investment decisions (Markowitz, 1959; Masron & Fereidouni, 2010). However, this
assumption could not explain investor behavior that appeared irrational. To better
understand investors’ behavior in investment strategy, several studies that explored
investors’ decisions found that their decisions were affected by their emotions and
perceptions (Baker, Coval, & Stein, 2007; Duxbury, 2015; Hyoyoun & Wook, 2013; Lee
& Andrade, 2015; Muradoglu & Harvey, 2012; Peteros & Maleyeff, 2013; Yu &
Xiaosong, 2015). A study conducted by Baker, Coval, and Stein (2007) found that
5
approximately 80% of investors’ decisions were influenced by their emotions and
perceptions. Financial investors continue to use the geographical diversification strategy
to increase returns and reduce risks (Markowitz, 1959; Masron & Fereidouni, 2010).
Despite evidence of the ineffectiveness of the geographical diversification strategy, U.S.
investors’ continued use of the strategy raises interest among researchers. Without
changing investors’ behaviors, increased risks and decreased investment returns may
result (Bobillo et al., 2008; Gocmen, 2010).
Statement of the Problem
Research shows that investors’ continue to use the MPT strategy of geographical
diversification as an investment strategy despite evidence that it is not effective, which
results in increased cost, decreased returns, and increased risks (Bobillo et al., 2008; Cai
et al., 2016; Chu-Sheng, 2010; Gocmen, 2010). Development in understanding of
investors’ behaviors indicates that investors do not always make rational financial
decisions, contrary to conventional finance theory (Duxbury, 2015; Garcia, 2013; Peteros
& Maleyeff, 2013; Reuter, 2009; Shefrin, 2007, 2013; Thaler, 2005; Yu & Xiaosong,
2015). Investors’ continued use of the MPT approach suggests their investment decisions
are influenced by cognitive factors such as perceptions and emotions, which may have
positive or negative impacts on their investment returns, consistent with behavioral
finance theory (Duxbury, 2015; Garcia, 2013; Peteros & Maleyeff, 2013).
The interconnection between investors’ perceptions and emotions and financial
decisions-making, in order to understand or change investors’ behaviors, information is
needed regarding why they continue to use geographical diversification as an investment
strategy (Dow, 2011). The behavioral finance theory has not yet been specifically applied
6
to U.S. investors’ geographical diversification strategy. Since the behavioral finance
theory tells us that investors are swayed by their perceptions and emotions, description of
the specific emotions and perceptions that U.S. investors’ experience related to using
geographical diversification strategy is needed in order to ultimately change use of this
ineffective approach (Garcia, 2013; Miccolis & Goodman, 2012). Without changing the
use of MPT through better understanding of investors’ perceptions, investors will
continue to use a strategy that results in decreased investment returns (Bobillo, Iturriaga,
& Gaite, 2008) and increased investment risks (Gocmen, 2010). Lack of this information
may result in decreased returns and increased risk on geographically diversified
investments (Bobillo et al., 2008; Gocmen, 2010).
Purpose of the Study
The purpose of this qualitative single case study was to explore U.S. financial
investors’ perceptions and emotions regarding their continued use of geographical
diversification as an investment strategy to increase investment returns and decrease
investment risks, when empirical evidence does not support the use of the strategy. The
primary data were obtained using open-ended interviews in-person or by telephone. For
the purpose of data triangulation, secondary data were gathered through self-reported
journaling during investment decision-making in line with qualitative case study’s best
practices (Yin, 2013). Participants were at least 18 years old, diversified their financial
investments geographically, and worked or resided in the Washington DC Metropolitan
Area. In order to allow for attrition and data saturation, 14 participants were purposely
selected but 10 participants were included in the case study (Stake, 1995). The responses
obtained from participants were presented using tables and direct quote results (Yin,
7
2003, 2013). The effectiveness of geographical diversification as a strategy is not
supported by evidence (Bobillo et al., 2008; Cai et al., 2016; Chu-Sheng, 2010; Gocmen,
2010), while the investors’ investing behaviors such as psychological bias as well as the
influence of the investors’ perceptions and emotions on their investment decisions are
well documented (Duxbury, 2015; Garcia, 2013; Peteros & Maleyeff, 2013; Reuter,
2009; Shefrin, 2007, 2013; Thaler, 2005; Yu & Xiaosong, 2015). Therefore, the findings
of this study contributed to research literature in the general areas of information on
MPT, diversification strategy, and emotions and perceptions in investors as well as the
prospects to educate investors targeting those thoughts and feelings about making smart
investment choices.
Theoretical/Conceptual Framework Overview
Kahneman and Tversky (1979) published an article that led to behavioral finance
theory, which provides a qualitative understanding of financial investment decisionmaking based on potential gains and losses rather than the actual outcome. Behavioral
finance theory takes into consideration investors’ perceptions of and emotions about
investment gains and losses, while the conventional finance theory does not consider
these factors (Baker et al., 2007; Sewell, 2007). Behavioral finance investors make their
financial investment decisions based on their emotions and perceptions rather than
empirical evidence (Kahneman & Tversky, 1979; Ritter, 2003). Behavioral financial
researchers have shown that experienced financial investors and financial managers
repeatedly make financial decisions that do not conform to conventional financial
investment pattern (Reuter, 2009; Shefrin, 2007, 2013). Approximately 80% of
individual financial investors make financial investment decisions consistent with
8
behavioral finance theory, which is a departure from logical financial investments (Baker
et al., 2007).
Behavioral financial theorists believe that investors will react differently to the
potential of gaining 50% on an investment and losing 25% on the same investment
compared to the potential of gaining 25% on an investment without risk due to
perceptions, emotions, and social biases (Kahneman, 2003; Kapor, 2014; Shefrin, 2007,
2013; Thaler, 2005). This behavior suggests that financial investors do not make perfect
investment decisions due to perceptions and emotions, thus anthropology and psychology
play significant roles in developing and understanding behavioral finance theory
(Kahneman, 2003; Shefrin, 2007, 2013; Shiller, 2003; Thaler, 2005).
Numerous studies have supported behavioral finance theory and shown that when
investors made investment decisions based on perceptions and emotions, there were
financial consequences such as decreased investment returns and increased investment
risks (Chaarlas & Lawrence, 2012; Mitroi, 2013). One study, which applied behavior
finance theory, investigated how investors made investing decisions found that when
investors based their investing decisions on emotions and perceptions, their returns were
lower and risks were higher (Mitroi, 2013). Other researchers used behavior finance
theory to survey 519 investors in India and found that 81% of participants demonstrated
anchoring biases, wherein investors refused to modify their use of ineffective investing
strategies based on their emotions and perceptions (Chaarlas & Lawrence, 2012). In
Croatia, Učkar and Carlin (2011) found that investors who made investing decisions
based on their perceptions, consistent with behavior finance theory, incurred heavy shortterm losses. Učkar and Carlin (2011) suggested further research was needed to assess the
9
long-term impact of behavioral finance on the capital market. While training on
behavioral finance theory helped increase the awareness of financial managers about
biases in financial investing decision-making, training in behavior finance alone was not
effective in changing their investment decision-making behaviors (Nikiforow, 2010).
A recent problem has developed in that individual U.S. financial investors’
behaviors are not consistent with rational finance behaviors, as they are adhering to a
strategy of geographical diversification despite evidence suggesting it is not effective,
indicating irrational financial decisions (Gocmen, 2010; Latif, Arshad, Fatima, & Farooq,
2011). This situation, where U.S. financial investors’ behaviors are not consistent with
increasing returns and reducing risks, calls for an extension of behavioral finance theory
to the strategy of geographical diversification because whenever investors make less than
optimal investment decisions, perhaps based on beliefs, perceptions, and emotions,
precious resources are being wasted (Hyoyoun & Wook, 2013; Mitroi, 2013; Mitroi &
Oproiu, 2014). While behavioral finance theory identifies the existence and importance
of investor emotions and perceptions in their decision making, it does not identify
specific emotions and perceptions which are influential within specific investing
situations, such as geographical diversification (Geambasu, Sova, Jianu, & Geambasu,
2013). Geographical diversification has not improved actual investment outcomes and
limited research exists to provide insight into the investors’ investment perceptions and
emotions about this strategy (Chu-Sheng, 2010; Taffler & Tuckett, 2007). The proposed
study will extend theory through application of the theory to a new investing context, use
of geographical diversification strategy despite recent evidence it is not effective (Chu-
10
Sheng, 2010; Taffler & Tuckett, 2007), as well as identifying the specific emotions and
perceptions that are driving investor behavior in this context.
The financial crisis in 2008 shows the MPT strategy to geographical
diversification was not only ineffective in maximizing return and minimizing risks, but
also contributed to the financial crisis because of the impact of the U.S. financial market
on other geographical financial markets (Chu-Sheng, 2010; Gocmen, 2010). While the
MPT strategy still advocates for geographical diversification, the theory has not done
much to understand and incorporate the perceptions and emotions of geographical
diversification investors (Geambasu et al., 2013). A deeper understanding of the U.S.
investors’ emotions and perceptions related to the geographical diversification strategy is
needed to change the trend of this irrational and ineffective investing strategy through
efforts targeted specifically at relevant emotions and perceptions (Chu-Sheng, 2010;
Taffler & Tuckett, 2007). Failure to conduct this study may lead to the investors’
continuous use of geographical diversification strategy, which results in decreased returns
and increased risks because the strategy is practically not effective in maximizing returns
and minimizing risks of geographically diversified investments (Chu-Sheng, 2010;
Geambasu et al., 2013). Therefore, this study will contribute to the behavioral finance
theory by providing insight into the perceptions and emotions of investors’ who continue
to use geographical diversification strategy.
Research Questions
This case study was designed around the central question of this study to explore
why U.S. investors continue to use the geographical diversification strategy when
empirical evidence indicates the strategy is not effective in maximizing returns and
11
minimizing risks. The central question was answered by using four open-ended questions
to collect data from participants in persons or via phone through open-ended interviews
questions as follows:
Q1. How do U.S. investors describe their emotions about using geographical
diversification as an investment strategy?
Q2. How do U.S. investors describe their perceptions of geographical
diversification as a strategy for increasing investment returns?
Q3. How do U.S. investors describe their perceptions of geographical
diversification as a strategy for reducing investment risks?
Q4. How do U.S. investors explain their use of geographical diversification
strategy, in the context of literature, which does not support the strategy?
Nature of the Study
This study was designed to explore U.S. investors continued use of the MPT, as
an investment strategy, which is now considered ineffective (Bobillo et al., 2008; Cai et
al., 2016; Chu-Sheng, 2010; Gocmen, 2010; Maldonado & Saunders, 1981; Raju &
Khanapuri, 2010; Singh, Kumar, & Pandey, 2010), but investors continue to use the
strategy due to psychological factors (Duxbury, 2015; Kahneman & Tversky, 1979;
Paruchuri & Misangy, 2015; Ritter, 2003; Yu & Xiaosong, 2015). Investors make their
financial investment decisions based on their emotions and perceptions rather than
empirical evidence (Duxbury, 2015; Kahneman & Tversky, 1979; Ritter, 2003; Yu &
Xiaosong, 2015), which is problematic due to the potential that decision leading to
increased investment risks and decreased investment returns may result (Bobillo et al.,
2008; Gocmen, 2010).
12
To achieve the purpose of the study, a qualitative single case study design was
used to obtain in depth information through interviews and participants’ journal entries
on their perceptions and emotions about using the strategy at a particular point in time
(Patton, 2002; Stake, 1995; Yin, 2003). To collect complex information for this study, as
compared to quantitative designs, this design was most appropriate for exploring the U.S.
investors’ perceptions and emotions regarding their continued use of the geographical
diversification as an investment strategy (Brinkmann & Kvale, 2005; Kvale &
Brinkmann, 2009). Hence, this qualitative design helped to obtain the information needed
to better understand the complexity of investors’ perceptions and emotions related to
using the investment strategy.
The study population consisted of 10 U.S. investors who were at least 18 years of
age, diversified their investment across different countries, and lived or worked in the
Washington DC Metropolitan Area. These participants were purposefully recruited for
the study via posting recruitment notice on social networks such as Academia.edu,
Facebook, LinkedIn, Meetup, and Meettheboss. Additionally, snowballing sampling was
utilized to recruit some of the participants when the existing participants shared
recruitment notice with new potential participants who were recruited and screened using
the inclusion criteria (Draper & Swift, 2011). For the purpose of data attrition and
saturation, 14 participants were recruited for the study; however, after attrition, 10
participants were included in the study. Using purposeful sampling and snowballing
sampling to recruit participants ensured that appropriate data were gathered to address the
problem (Draper & Swift, 2011).
13
Utilizing semi-structured interview questions and journaling, qualitative data was
collected for the study. The interviews were conducted either in person or via phone
depending the participant’s preference. The interview questions and journaling prompts
aligned with the research questions to explore investors’ perceptions and emotions related
to using geographical diversification as an investment strategy. To enhance quality of the
data collection, two individuals known to me who met inclusion criteria reviewed the
interview questions and journal prompts through a field-tested. This was to make sure the
questions were interpreted as the researcher planned in order to obtain the appropriate
information from participants and address researcher bias and interview validity
(Shenton, 2004; Turner, 2010).
The participants’ responses obtained through interviews and journaling were
transcribed into password protected Microsoft Word documents to ensure confidentiality
and security (Brinkmann & Kvale, 2005; Kvale & Brinkmann, 2009). Data collection
was stopped as soon as data saturation was achieved. Data saturation occurred after the
tenth participant completed the interviews and journal entries and no new themes were
being discovered, thus it was confirmed that data saturation was achieved with the tenth
participant. Data were manually coded and analyzed using themeing. The data analysis
was included in the final report after reflection of the themeing.
Significance of the Study
This study was significant because financial investors could apply the outcomes
of the study in their investment decision making while financial researchers and students
will better understand investors’ behavior through examining the study results. The
investors’ investment behaviors needed to be explored due to their continued use of
14
geographical diversification strategy when evidence does not support its use. Research
suggest that if investors’ perceptions and emotions can explain their use of the
diversification strategy, then the investors’ decision making is consistent with behavioral
finance (Duxbury, 2015; Garcia, 2013; Peteros & Maleyeff, 2013), extending application
of the finance theory to this particular investment context.
According to Dow (2011), information is needed to better understand investors
due to the interrelationship between investors’ decision-making process and their
perceptions and emotions. Specific perceptions and emotions that influence explicit
investment strategies such as geographical diversification have not been identified (Dow,
2011). The findings of this study will also contribute to research literature in the general
areas of information on MPT, diversification strategy, and emotions and perceptions in
investors. Financial students and researchers may use the results of this study to enhance
their knowledge about the investors’ perceptions and emotions regarding the investors
continued use of the geographical diversification strategy. This study’s findings could
contribute to improving financial investment practices. Financial investors not only do
not make perfect investment decisions but also their investment decisions are influenced
by psychological factors such as perceptions and emotions during investment decision
making (Kahneman, 2003; Shefrin, 2007, 2013; Shiller, 2003; Thaler, 2005). Without
changing investors’ behaviors increased risks and decreased investment returns may
result (Bobillo et al., 2008; Gocmen, 2010). The information obtained from the
description of the investors’ perceptions and emotions related to using the diversification
strategy may be used to educate investors through targeting thoughts and feelings that
contribute to making smart investment choices.
15
Definition of Key Terms
Considering the fact that this study explores the perceptions and emotions of U.S.
investors’ use of geographical diversification, as an investment strategy, it is important
that some terms used in the study, which may have different meanings, as used in other
research studies, were defined in this section.
Behavior Finance. Behavior finance is the approach to financial investment
decision where the psychological factors such as perceptions, emotions, and bias of the
investors are factored into their investment decision making (Kahneman, 2003;
Kahneman & Tversky, 1979).
Conventional Finance Theory. Conventional finance theory is the approach to
financial investment where all financial investors are assumed to make rational
investment decisions to maximize returns and minimize risk (Markowitz, 1959; Masron
& Fereidouni, 2010).
Financial Literature. Financial literature is financial information obtained by
participants from formal sources such as business news, trading journals, business and
articles, and books (Ateş, Coşkun, Şahin, & Demircan, 2016; Gonzalez-Perez, 2015).
Geographical Diversification. Geographical diversification is an approach to
investment in which investors invest their portfolios across different geographical
locations, in different foreign countries, with the aim of maximizing returns and
minimizing risks (Delcoure, 2010).
Modern Portfolio Theory (MPT). Modern portfolio theory describes an
approach to financial investment where all investors are considered to be rational
16
investors and therefore will diversify their portfolios to maximize returns and minimize
risks (Markowitz, 1959).
Summary
This study was designed to examine the problem of investors’ continued use of
the MPT strategy of geographical diversification as an investment strategy in spite of the
evidence that the strategy is not effective, which results in increased cost, decreased
returns, and increased risks (Bobillo et al., 2008; Chu-Sheng, 2010; Gocmen, 2010). The
investor’s investment behavior of the continued use of the geographical diversification
strategy, to increase returns and reduce risks decision, needs to be further explored
(Garcia, 2013; Peteros & Maleyeff, 2013). This behavior suggests that investors do not
always make rational decisions and that their decisions are influenced by their emotions
and perceptions, consistent with behavioral finance theory (Garcia, 2013; Peteros &
Maleyeff, 2013; Reuter, 2009; Shefrin, 2007, 2013; Thaler, 2005).
The purpose of this qualitative single case study was to understand U.S. investors’
perceptions and emotions regarding their continued use of geographical diversification as
an investment strategy. The research questions addressed the purpose of this study and
are related to investors’ emotions during decision-making, perceptions of the strategy to
increase returns, perceptions of the strategy to decrease risk, and continued use of
diversification strategy when evidence does not support its use. A sample of 14 U.S.
investors, who diversify their financial investments across different countries, were
purposefully selected to participate in the study. Ten participants were eventually
included in the case study after attrition of participants’ responses. Qualitative data was
collected via semi-structured interview questions in person or via phone and journaling.
17
The qualitative data obtained through interviews and journaling were transcribed into
password protected Microsoft Word documents, manually coded, and analyzed using
themeing.
This study contributes to knowledge and literature by extending application of
behavioral finance theory to the MPT, geographical diversification strategy. Researchers
and students may use the findings of this study to enhance their knowledge on the
investors’ perceptions and emotions related to continued use of an ineffective strategy.
Additionally, information from this study regarding investors’ perceptions and emotions
of using the diversification strategy may be used to develop teaching tools for investors,
focusing on those thoughts and feelings about making prudent investment decisions.
18
Chapter 2: Literature Review
The purpose of this qualitative single case study was to understand U.S. investors’
perceptions and emotions regarding their continued use of the geographical
diversification as an investment strategy. The information in the literature review can be
used to further understand the U.S. investors’ perceptions and emotions regarding the use
of the strategy as it relates to behavioral finance. The purpose of this literature review
was to provide the contextual framework, as related to the problem statement and
research questions, this study seeks to explore and answer. The literature review will
focus on U.S. investors’ perceptions and emotions regarding the use of geographical
diversification, as an investment strategy, as it relates to behavioral finance. The
subsections of the literature review will focus on the background of modern portfolio
theory (MPT), MPT as an investment strategy, understanding investor behavior,
influence of emotions on investors’ financial decision-making, influence of perception on
investors’ financial decision-making, influence of psychological bias on investors’
financial decision-making, problems and limitations of previous studies, and summary of
the literature review.
In the course of reviewing the existing literature, EBSCOhost, ProQuest, and Sage
journals online databases from Northcentral University (NCU) were searched. The key
terms that were used during the searches included behavioral finance theory,
conventional finance theory, geographical diversification strategy, investment strategy,
international diversification strategy, and modern portfolio theory. Additional search
phrases included effects of investors’ emotions on financial investment decisions, effects
of investors’ perceptions on financial investment decisions, how emotions influence
19
investment decisions, how perceptions influence investment decisions, impacts of
investors’ emotions on financial investment decisions, impacts of investors’ perceptions
on financial investment decisions, and how emotions and perceptions influence
investment decisions. These phrases were examined to help obtain the information
needed to understand the U.S. investors’ perceptions and emotions regarding the use of
the geographical diversification strategy, as it relates to behavioral finance. Scholarly
and peer-reviewed articles and journals that addressed the key search terms were the
central focus of the literature review. Additionally, incorporated into the review were
books ranging from conventional finance through investment to behavioral finance.
Articles and journals from 1948 to 2016, which were scholarly and peer-reviewed, were
examined to ensure that the information has stood the test of time.
Theoretical/Conceptual Framework
Historically, conventional finance advocates have argued that financial investors
are rational and financial information provided by these investors is adequate (Friedman
& Savage, 1948). Supporters of the conventional finance theory believed that the
financial market was efficient and that financial decisions accurately reflected the
available information based on mathematical calculations (Friedman & Savage, 1948).
However, the Great Depression’s financial downturn prompted people to think beyond
the assumption that investors are rational and that their financial investment decisions are
rational (Markowitz, 1952). Prior to the financial crisis during the Great Depression in
the 1930s, on the basis of mathematical calculations, investors invested their financial
assets in one stock with potential for high returns (Markowitz, 1959). However, after the
Great Depression, a graduate student, Harry Markowitz, realized investors were not
20
diversifying their financial assets and did not consider investment risk when making
investment decisions.
The lack of diversity among investors’ portfolios coupled with their disregard for
investment risk prompted Markowitz to publish a journal entitled “Portfolio Selection” in
1952 (Markowitz, 1959). Markowitz (1959) proposed that investors should carefully
select their investment portfolios through diversification to maximize returns and reduce
risk. Markowitz (1959) argued that the strategy of diversifying investment portfolios
may lead to increased returns on investment and reduced risk. Markowitz’s work on
portfolio diversification led to the development and popularization of modern portfolio
theory (MPT). The MPT employs a diversification strategy in financial investments to
increase returns on investments while reducing investment losses (Markowitz, 1959).
Investors have applied the MPT strategy of financial investment over several decades.
For example, Solnik (1974) conducted a seminal study that examined geographical
diversification of stocks from U.S., U.K., France, Germany, Italy, Belgium, Netherlands,
Switzerland markets. Solnik found that investments that were diversified internationally
provided greater risk reduction and increased returns better than the domestically
diversified investments. Similarly, Meriç, Jie, and Meriç (2016) examined the
performance of diversified portfolios in Asia and Africa. The researchers investigated the
performance of investors in the United States, Canada, Germany, the United Kingdom,
and France on the Indonesian, Philippine, Malaysian, and Thai emerging stock markets,
as well as the Jordanian, Moroccan, Egyptian, and Pakistani emerging stock markets.
Meric et al. (2016) found that the investors from the U.S., Canada, Germany, the United
21
Kingdom, and France had the greatest portfolio diversification benefit on investments in
the Indonesian, Philippine, Malaysian, and Thai emerging stock markets.
Between the 1960s and 1990s, the MPT approach was the cornerstone strategy of
the financial investment market (Konstantinidis, Katarachia, Borovas, & Voutsa, 2012).
However, the 2008 financial crisis challenged both the MPT and conventional finance
theory (Hommes & Wagener, 2009). For example, from October 2007 to May 2009, as
the 2008 financial crisis heightened, the Dow Jones Industrial Average dropped by 50%
(Smith & Harvey, 2011). The nature and effect of the 2008 financial and economic
downturn demonstrated that financial markets’ outcomes may be influenced not only by
rational financial investing behavior, as would be predicted by conventional finance
theory, but also seemingly irrational financial investing behavior (Hommes & Wagener,
2009). Additionally, the impact of the 2008 financial crisis posed a challenge to the
MPT’s strategy that the use of geographical diversification of financial assets might
maximize profit and reduce loss (Baker, Wurgler, & Yuan, 2012). Such a drastic decline
in the returns from geographical diversification in the financial stock markets and
investors’ continued use of the strategy called for a comprehensive understanding of
investors’ strategies and behaviors (Hommes & Wagener, 2009).
MPT as an Investment Strategy
Historically, research supported the MPT strategy that the use of geographical
diversification as a strategy may lead to increased investment returns and decreased
investment risks. Solnik (1974) conducted a seminal study that compared investments,
which were diversified domestically to those investments, which were diversified across
different geographical areas. Portfolios containing an increasing number of stocks from
22
U.S., U.K., France, Germany, Italy, Belgium, Netherlands, Switzerland, and international
locations were collected and analyzed. Solnik found that investments that were
diversified internationally provided greater risk reduction and increased returns better
than the domestically diversified investments. For example, when the size of the domestic
portfolio increased beyond 20 stocks, a relatively small reduction in investment risk and
increase in returns occurred. On the contrary, a substantial reduction in investment risk
and increase in returns occurred when the size of the international portfolios increased
beyond 20 stocks.
To understand the influence of international diversification on investment
outcomes, Odier and Solnik (1993) conducted a study on benefits and risks of
geographical diversification among British, German, Japanese, and U.S. investors. Data
obtained from the international financial markets for the analysis ranged from 1970 to
1990. The findings showed low correlations between the international financial markets.
The outcomes demonstrated that geographically diversified investments were more
beneficial and reduced risks. Odier and Solink’s results were consistent with the findings
of Solink (1974). Interestingly, the results showed that investors who diversified their
portfolios on the Japanese financial markets realized the most financial benefits from
international diversification.
Many years later, Hargis and Mei (2006) explored whether financial assets that
were diversified internationally or across different industries yielded the most benefits.
The authors analyzed data from different industries and across different countries. The
data consisted of discount rate, cash flow, and interest returns spanning from 1987 to
1999. Results of Hargis and Mei (2006) show that the correlations between investment
23
diversification outcomes across different countries were low while the correlations
between diversification in different industries were high. Hargis and Mei’s findings
indicated that financial portfolios that were diversified geographically provided more
benefits than industrial diversification. The international diversification results were
consistent with the findings of Odier and Solnik (1993) and Solink (1974), which asserted
that geographically diversified investments provided benefits to financial investors.
However, the non-beneficial diversification across different industries raised interest
among researchers.
In examining the benefits of global portfolio diversification, on the emerging
stock markets, Meriç, Jie, and Meriç (2016) examined the performance of diversified
portfolios. The researchers investigated the performance investors of the U.S., Canadian,
German, U.K., and French on the Indonesian, Philippine, Malaysian, and Thai emerging
stock markets and the Jordanian, Moroccan, Egyptian and Pakistani emerging stock
markets. Meric et al. (2016) found that the investors of the US, Canadian, German, U.K.,
and French had the greatest portfolio diversification benefit on investments in the
Indonesian, Philippine, Malaysian, and Thai emerging stock markets. The results showed
that the U.S. investors could increase their investment returns and reduce their risks by
diversifying on the Indonesian, Philippine, Malaysian, and Thai emerging stock markets.
Meric et al.’s (2016) findings were consistent with findings from of Hargis and Mei
(2006), Odier and Solnik (1993), and Solink (1974), which showed that geographical
diversification is effective in increasing returns and reducing risks.
Using the modern portfolio theory (MPT) as an investment strategy, Masron and
Fereidouni (2010) examined the effectiveness of diversification on performance
24
outcomes of investment in the housing industry in Iran. The data obtained from the
Central Bank of Iran, Ministry of Housing and Urban Development, and Tehran Stock
Exchange from 1993 to 2008 was examined. The correlational analysis was used to
examine the portfolio diversification benefits of the housing industry and the relationship
between the housing performance and inflation while the risk-to-reward ratio was
employed to examine the risk adjusted performance of housing and other financial assets
(Masron & Fereidouni, 2010). The results showed that diversification in the housing
industry provided more benefits than risks and investment in the housing industry
resulted in lowest risk-to-reward ratio. The returns on housing investment exceeded rate
of inflation and there was a positive and significant relationship between housing returns
and rate of inflation (Masron & Fereidouni, 2010). The authors recommended future
study to explore whether these results would apply to other sectors of the market (Masron
& Fereidouni, 2010). Masron and Fereidouni’s findings were consistent with the findings
of Hargis and Mei (2006), Odier and Solnik (1993), and Solink (1974), which
demonstrated that geographically diversified portfolios improved returns on investment
and reduced risks.
In in the wake of 2007-2008 global financial crisis (GFC), Haran et al. (2016)
sought to improve the transparency of European emerging real estate market dynamics
and performance by examining the extent and nature of inter-relationships between three
emerging real estate markets namely, the Czech Republic, Hungary, and Poland. In
addition, the authors sought to determine the rationale and effectiveness of emerging real
estate markets within a Pan-European investment portfolio. Haran et al. (2016) found that
there was lack of relationship (uniformity) among the markets. The findings indicate that
25
geographical diversification on those European emerging real estate markets was
effective in terms of both performance enhancement and risk diversification. Haran et
al.’s findings were in alignment with the findings of Hargis and Mei (2006), Masron and
Fereidouni (2010), Odier and Solnik (1993), and Solink (1974), which showed that
geographically diversified portfolios improved returns on investment and reduced risks.
To assess the diversification benefits from Islamic investment, during the
financial turmoil, Saiti, Bacha, and Masih, (2014) examined whether the Islamic stock
indices provided special avenue for the U.S.-based investors. Using the recentlydeveloped Dynamic Multivariate GARCH approach and Dynamic Conditional
Correlation (DCC), the authors examined both the conventional and Islamic MSCI
indices of Japan, GCC ex-Saudi, Indonesia, Malaysia and Taiwan provide better
diversification benefits compared to Korea, Hong Kong, China, and Turkey. The findings
showed that the investment in Islamic countries provided better diversification benefits of
increasing returns and reducing risks compared to the Far East countries. Saiti et al.’s
findings were consistent with the findings from Haran et al. (2016), Hargis and Mei
(2006), Masron and Fereidouni (2010), Odier and Solnik (1993), and Solink (1974),
which showed that geographically diversified portfolios improved returns on investment
and reduced risks. The research published by Haran et al. (2016), Odier and Solnik
(1993), and Solink (1974) has stood the test of time by demonstrating that the
geographical diversification strategies help to increase returns and reduce risks.
To assess evidence of the existence of diversification benefits in international
stock markets, Mimouni, Charfeddine, and Al-Azzam (2016) included and examined the
emerging oil producing countries in a global portfolio. Mimouni et al. (2016) explored
26
whether recent oil shocks and financial events have significant impact on the conditional
correlations and diversification benefits. Results showed the correlation in Gulf
Corporation Council (GCC) oil-producing countries (e.g., Saudi Arabia, Kuwait, the
United Arab Emirates, Qatar, Bahrain, and Oman) stock markets remained low and
constantly offered high diversification benefits. The findings show that geographical
diversification on the emerging and oil-producing countries offered more potential for
international diversification to increase investment returns and reduce investment risks.
The authors findings are consistent with the findings of Haran et al. (2016), Hargis and
Mei (2006), Masron and Fereidouni (2010), Odier and Solnik (1993), Saiti et al. (2014),
and Solink (1974), which demonstrated that geographically diversified portfolios
improved returns on investment and reduced risks.
In another study, Torres García-Heras (2011) examined the effectiveness of using
geographical diversification to reduce risk by analyzing the credit default swap (CDS)
markets in US, France and Germany, PIIS (e.g., Portugal, Ireland, Italy, Greece and
Spain), and Mexico and South America (e.g., Argentina, Brazil, Chile, Columbia and
Peru). The data obtained compared the corporate CDS and national sovereign CDS. The
results showed the South America countries experienced lower risk with diversified
investments than most developed European countries, especially Spain. While highly
diversified countries demonstrated lower investment risks, investments that were
diversified in corporate bonds were safer than sovereign bonds in Spain (Torres GarcíaHeras, 2011).
To examine return and volatility linkages among equity markets, Yavas and Dedi
(2016) investigated the linkages among equity returns and transmission of volatilities in
27
the following countries: Germany, Austria, Poland, Russia, and Turkey. Multivariate
Autoregressive Moving Averages (MARMA) and the Generalized Autoregressive
Conditional Heteroskedasticity (GARCH) were used to analyze the data. Yavas and Dedi
(2016) found that there was significant correlation of performance of investment returns
among countries under consideration. Results showed that the Turkish and Russian
markets were exposed to more volatility than Austria, Germany and Poland markets. The
findings indicated that geographical diversification on Austria, Germany, and Poland’s
markets had less risk and could be used to reduce investment risks. Yavas and Dedi’s
findings were consistent with Torres García-Heras’ (2011) findings that geographical
diversification was effective in reducing investment risks.
In order to understand the influence of globalization of the financial markets, on
geographical diversification strategy, Srivastava (2007) investigated the co-integration
among seven Asian financial markets and U.S. financial markets. Data was obtained from
U.S. and Japan financial markets in one category and India, Indonesia, Hong Kong,
Korea, Malaysia, Singapore, and Taiwan’s financial markets in another. The data
collected from the various stock markets spanned from September of 1997 to June of
2006. Srivastava found that the correlation between Asian financial markets and U.S.
financial markets was low which implied that when the U.S investors diversified their
investment on the Asian markets, their investment returns increased and their risks
reduced. The findings showed that the growth in globalizations has both benefits and
drawbacks. In short-term investments, the benefits of investment returns outweigh the
investment risks. This finding shows that geographical diversification relies increasingly
on investment in emerging markets. However, due to the interdependence of the global
28
financial markets, the benefit of geographical diversification strategy has decreased. This
decrease is due to the financial activities of the emerging markets being dependent upon
the developed countries’ financial markets.
Related to this, not all research has found these benefits of the geographical
diversification strategy. A study by Cheng and Roulac (2007) examined the effectiveness
of geographical diversification in improving outcomes of real estate investments.
Quarterly published data from NCREIF property indices was selected for the analysis.
The dataset of 244 sub-indices was collected from first quarter of 1993 to fourth quarter
of 2004 for the study. Cheng and Roulac (2007) found that the effectiveness of
geographical diversification, in real estate investment, is limited and in order to eliminate
diversifiable risk, the real estate investments should be held in a large number of
properties. The results showed that the effectiveness of the geographical diversification
strategy may vary depending upon the type of property under consideration. For example,
Cheng and Roulac (2007) found that the effectiveness of geographical diversification in
real estate investment is limited to the size of the investment. Additionally, Haran el al.
(2016) found that investors who diversified in emerging real estate markets of the Czech
Republic, Hungary, and Poland had potential to enhance their investment performances.
Other research conducted by Maldonado and Saunders (1981) investigated the
performance of portfolios, which were diversified domestically and across different
geographical areas. From the point of view of United States investors over different time
horizons, a United States stock index and four foreign stock market indices, Japan,
Germany, Canada, and the United Kingdom, were examined. The index stock data was
derived from stock indices published in the International Monetary Fund's international
29
financial statistics because the dataset has provided the foundation for most previous
empirical studies of international diversification. Maldonado and Saunders found that
there was no significant difference between the performance of domestically diversified
investments and internationally diversified investments. This result showed that the
geographical diversification strategy does not increase returns while reducing investment
risk as previously thought. The findings were consistent with Bobillo et al. (2008), ChuSheng (2010), and Gocmen (2010), which showed that the geographical diversification
strategy did not increase returns nor did it decrease investment risks, but contradicted
findings by Solnik (1974), Srivastava (2007), and others.
With the introduction of Euro currency on the European financial markets and to
explore its effects on portfolio diversification, Kashefi (2006) investigated the influence
of the Euro currency on financial investment diversification on the Euro countries and
U.S. investors. From the European, Australia, and Far East (EAFE), U.S., and European
financial markets, the data obtained from financial market indices ranging from 1993 to
2003 were analyzed. Kashefi’s findings showed that with the introduction of the Euro
currency among the Euro member countries, correlations of investment outcomes and
diversification among the financial markets increased. In addition to the increased
correlation among the European markets, the correlations among the EAFE, U.S., and
European financial markets also increased. The increase in the correlation among the
financial markets showed that the benefits of international diversification have
significantly reduced, which makes geographical diversification less attractive. This
increase in correlation among the financial markets means that the investments
diversified on the EAFE, U.S., and European financial markets depend on one another
30
and thus the financial markets are exposed to similar investment returns and risks
(Kashefi 2006). This correlation among the markets suggests that when investors
diversified their investments across different financial markets, their investment returns
and risks did not change (Kashefi, 2006). Kashefi’s findings were consistent with the
findings of Chu-Sheng (2010), Gocmen (2010), and Maldonado and Saunders (1981), but
contradicted Srivastava (2007), Solnik (1974), and others. In this age of globalization, the
performance of a financial market on one continent has influence on another financial
market on a completely different continent. In order to assess the influence of
globalization on the financial markets, Singh, Kumar, and Pandey (2010) examined how
diversified investments in Asia, Europe, and North America performed with regards to
interdependence and influence of one market on the other. The authors examined how
price and volatility spillovers influenced diversified financial investments across North
American, European, and Asian stock markets. The return spillover is modeled via a
vector autoregressive (VAR 15) model in which fifteen global indices represent their
respective stock market. Same day return of the spillover is also analyzed using a VAR
and autoregressive (AR) model with exogenous variables. In incorporating the same day
effect, the volatility spillover is modeled through autoregressive -generalized
autoregressive conditional heteroskedasticity (GARCH). The AR, GARCH, and VAR
models are financial and economic analytical models used to analyze data. Singh et al.
(2010) found that there was a great interdependency and influences of one market on
another such that there was no trend of increased returns or decreased risks of the
geographically diversified investments. These findings were consistent with Maldonado
31
and Saunders (1981) but contradicted the findings of Solnik (1974) and Srivastava
(2007).
A similar study to Singh et al. (2010) and Maldonado and Saunders’ (1981)
studies was conducted by Raju and Khanapuri (2010), which examined the performance
of diversified financial investments in six Asian markets from U.S. investors’
perspectives. Between January 1, 1998 and December 31, 2008, the authors collected
daily returns data of the composite stock market indices of U.S. (S&P 500), South Korea
(KOSPI), China (Shanghai Composite, SSEC), Malaysia (KLSE Composite), Indonesia
(QKSE Composite), Thailand (SET), and India (NSE Nifiy). The findings showed that
investments that were diversified in the Asian financial markets did not increase returns
nor did the diversification reduce risks. While previous high investment returns in the
Asian financial markets have attracted foreign investors, the interdependence of
international markets has made the geographical diversification strategy ineffective on
the emerging Asian markets (Raju & Khanapuri, 2010). Raju and Khanapuri’s findings
were consistent Maldonado and Saunders (1981) and Singh et al. (2010), but contradicted
the findings of specifically Solnik (1974) and Srivastava (2007). In exploring the impact
of geographical diversification on the Chinese banks, Cai, Xu, and Zeng (2016) examined
financial corporations in the Asian market. The findings showed that geographical
diversification expansion helped improved market shares and net interest shares. Cai et
al. (2016) found that investors incurred higher operating costs as the level of
diversification increases. Cai et al.’s (2016) results suggest a potential tradeoff between
economic gains (e.g., market shares or interest margins) and operating costs due to
expansion of investments across different countries. Moreover, geographical
32
diversification has a positive but insignificant impact on return on asset (ROA). Cai et
al.’s findings were consistent with Maldonado and Saunders (1981), Raju and Khanapuri
(2010), and Singh et al.’s (2010) findings that geographical diversification strategy was
not effective in increasing returns and reducing risks. Cai et al. (2016) cautioned
investors to carefully analyze and conduct cost-benefit analysis before deciding on the
strategy due to the high cost of operating geographical diversification investments.
The use of geographical diversification as an investment strategy has mixed
outcomes from financial researchers and practitioners. While some research by Hargis
and Mei (2006), Markowitz (1959), Masron and Fereidouni (2010), Odier and Solnik
(1993), Solnik (1974), Srivastava (2007), and Torres García-Heras (2011) supported
geographical diversification as an effective investment strategy, the majority of research
by Bobillo et al. (2008), Cai et al. (2016), Chu-Sheng (2010), Gocmen (2010),
Maldonado and Saunders (1981), Raju and Khanapuri (2010), and Singh, Kumar, and
Pandey (2010) did not support the strategy. The differences among advocates of the
strategies and challenges associated with internationalization of financial markets have
prompted interest in exploring and understanding investors’ behaviors with regards to
using a strategy that does not have complete empirical support.
Understanding Investor Behavior
For many decades, financial researchers have applied conventional finance theory
to explain how investors make decisions, which assumes that financial investors make
rational investment decisions (Markowitz, 1959; Masron & Fereidouni, 2010). Supporters
of conventional finance theory have for many years held the view that all financial
investors are rational and value investment portfolios rationally and that any deviation
33
from the rational investment decision-making corrects itself (Cotugno & Stefanelli,
2012). The globalization of financial markets has shown that the benefits of geographical
diversification strategy have diminished as a result of the interdependence of global
financial markets (Gocmen, 2010; Maldonado & Saunders 1981; Raju & Khanapuri,
2010; Singh et al., 2010). Investors continued use of geographical diversification
strategy, without empirical support, has raised interest about thought process of the
investors during investment decisions (Baker, Wurgler, & Yuan, 2012). Additionally,
investors’ continued behaviors of making financial investment decisions based on
perceptions and emotions influenced by psychological bias has deepened researchers’
interests in behavioral finance (Garcia, 2013; Peteros & Maleyeff, 2013; Reuter, 2009;
Shefrin, 2007, 2013; Thaler, 2005).
Studies have revealed that financial investors’ investment decisions do not always
conform to the conventional finance theory of financial investment. Advocates of
behavioral finance believe that the conventional finance theory has not adequately
explored the influence of psychological factors on investors’ financial decision making
processes (Fenzel & Pelzmann, 2012). Complex economic models, investors’ limited
understanding of financial information, ever changing financial markets, and the
influence of psychological factors on investors’ decisions make conventional finance
theory more untenable (Fenzel & Pelzmann, 2012; Shiller, 2003).
Researchers developed behavioral finance theory, which consider how
psychological factors influence investors’ decision making process when conventional
finance theories fail to address the investors’ behavior and market anomalies (Muradoglu
& Harvey, 2012). Advocates of behavioral finance theory consider how various
34
psychological characteristics such as anchoring biases, emotions, and perceptions
influence financial decision-making processes of investors and financial planners
(Hyoyoun & Wook, 2013; Peteros & Maleyeff, 2013). Researchers of behavioral finance
further argued that conventional finance theory ignores the humanistic behavior of
financial investors and managers as it relates to investment decision-making (Peteros &
Maleyeff, 2013). Investors’ humanistic behaviors are important to researchers because
understanding these behaviors helps researchers explore and develop effective strategies
for financial investors. Acknowledging, understanding, and modifying the behavioral
biases of the financial investors and controlling such biases caused the investors to make
profitable and sound investment decisions and thereby become better investors (Suresh,
2013).
In other study, Nofsinger (2005) examined his students and the investment club
members using mental accounting. Mental accounting or psychological accounting is
when investors analyze, group, and evaluate potential financial outcomes before they
make investing decisions (Nofsinger, 2005). Participants were told to estimate the risks of
adding new individual stocks to the existing investment. Results showed that
undergraduate students, graduate students, and members of the investment club
considered the individual stock with high risks without estimating the entire portfolio’s
risks. Investors should analyze the new portfolios in addition with the existing
investments before making investing decisions (Nofsinger, 2005). This finding shows
cognition limitations among investors when analyzing financial information. For
example, due to cognitive limitations, investors were not able to accurately analyze the
risk of both new and existing investment portfolios before making financial decisions.
35
The psychological aspects of investors and the complexities in fast-changing
financial investment markets have made it difficult for financial investors to rely on
complicated mathematical derivation to make sound investment decisions (Chandra,
2009). While the globalization of the financial markets may have made financial
information readily available to investors, the psychological complexities of processing
voluminous information to make sound financial decisions is an arduous task for the
investors (Agrrawal & Borgman, 2010; Rosillo, De la Fuente, & Burgos, 2013).
Investors’ emotions, perceptions, and biases may be intensified when they are
encountered with an overwhelmingly large amount of financial information to make
investment decisions. Investors make less than optimal investment decisions when their
decisions are influenced by emotions, perceptions, and psychological bias (Chandra,
2009). Psychological factors such as emotions, perceptions, and bias play a significant
role during financial investment decisions (Webber & Johnson, 2009). Advocates of
behavioral finance theory consider investors’ investment behavior as normal behavior
even when financial investors’ decisions result in decreased investment returns and
increased investment risks (Taffler & Tuckett, 2010). Even neoclassical economist
Keynes, in Keynes (1964), observed that investors’ investment decisions were not usually
based on classical mathematical formulations. Instead, the investors’ decisions showed
pattern of psychological influences that sometimes resulted in less profit and increased
risks (Keynes, 1964). This is an indication that the investors’ decisions are influenced by
psychological factors such as perceptions, emotions, and bias. Keynes (1964) observation
that investors’ investment decisions were not usually based on classical mathematical
formulations was later supported by behavioral finance economists, including Akerlof
36
and Shiller (2010) and Kahneman (2011). According to research, financial investors
have a tendency to make investment decisions based on emotions, perceptions, and bias,
which can result in less than optimal outcomes (Kahneman, 2011).
Influence of emotions on investors’ financial decision-making. Numerous
researchers have investigated how emotions influence investors’ decision-making
processes (Lazarus & Lazarus, 1994). Emotions influence people in every aspect of their
lives including investment decisions. Theories of emotion can help explain how emotions
impact investor behavior. Lazarus and Lazarus (1994) posited that emotion and decision
making based on that emotion occur simultaneously. The importance of simultaneous
development of emotions and decision-making ability is routed in the human survival
instinct (Lazarus & Lazarus, 1994). For example, when a human being recognizes a
snake, the person may experience heart palpitations. The development of heart
palpitations indicates the immediacy of danger from seeing the snake, and the resulting
emotional feelings interpret the danger so that the person will run away. When stock
prices significantly rise or fall, investors experience emotions (Lazarus & Lazarus, 1994).
An increase in portfolio prices would result in positive emotional feelings, while a
decrease in stock prices results in negative emotional feelings. Similar to the individual
seeing a snake, the physiological reaction and associated emotion is interpreted and leads
to action (Lazarus & Lazarus, 1994). The positive emotional feelings may motivate
investors to further invest in a portfolio while negative emotional feelings may
discourage investors from investing in the portfolios.
Researchers have investigated how peoples’ emotions influence the way they
process information. Positive emotional feelings may indicate that the information has
37
been thoroughly processed and the environment is conducive for decision-making, while
negative emotional feelings may suggest that more information is needed to make sound
judgment (Schwarz, 2002). Some of the emotional experiences that affect peoples’
decisions include sadness, happiness, anxiety, fear, pride, shy, joy, or sorrow, among
others (Schwarz, 2002). Investors, like the rest of the population, experience emotions
during decisions-making processes. Emotional feelings, negative or positive, may
influence the investors’ financial decisions (Reyes, 2006). When investors’ financial
decisions are negatively influenced by their emotions, they make less optimal investment
decisions. On the contrary, investors make beneficial decisions when their decisions are
positively influenced by their emotions (Reyes, 2006).
A study conducted by Shiv, Loewenstein, Bechara, Damasio, and Damasio (2005)
examined how brain activities related to emotions (e.g., sadness, anxiety, obsession, lack
of self-control, and self-denial) influence the number of investment decisions that
investors make. The findings showed that patients with brain lesions related to emotions
made 20 more rounds of investment decisions than patients with brain lesions unrelated
to emotions. The application of these findings to all financial investors implies that brain
activities relating to emotions such as sadness, anxiety, obsession, lack of self-control,
and self-denial, which are common among both emotional investors and patients with
brain lesions, affect how investors make investment decisions. In relating the findings to
financial investors’ decision making, investors who made investment decisions when
they were depressed, anxious, obsessed with investment, lacked self-control, or exhibited
self-denial made more irrational investment decisions, which resulted in financial losses.
In addition, Shiv et al. (2005) showed that when participants with brain lesions unrelated
38
to emotions began to lose money, those investors traded less compared to participants
with brain lesion related to emotions. In relating the findings to all financial investors’
decision making, and consistent with behaviors of investors who based their financial
decisions on emotions, Shiv et al. showed how emotions could cause investors to make
unsound investment decisions.
In exploring the influence of emotions on investors’ decision-making, MyeongGu and Barrett (2007) examined emotions of 101 stock investors making investment
decisions over a period of 20 consecutive days. The high and low emotional feelings
corresponded to being happy and sad, respectively. Contrary to the general perception
that feelings are generally bad for decision making, the authors found that stocks of
financial investors who demonstrated high feelings during investment decision-making
performed better than investors’ who demonstrated low emotional feelings (Myeong-Gu
& Barrett, 2007). This result indicated that when investors have high feelings, they were
capable of controlling their biases better than those who had low feelings and
subsequently made profitable investment decisions (Myeong-Gu & Barrett, 2007). Like
Myeong-Gu and Barrett, Gambetti and Giusberti (2012) examined investors’ emotions
such as anger and anxiety during investment decision-making. The findings showed that
investors who were emotionally angry made medium risk investment decisions while
investors who demonstrated anxiety made low risk investment decisions. Gambetti and
Giusberti findings were consistent with the findings of Myeong-Gu and Barrett (2007).
In investigating whether mental pitfalls, due to emotions, caused financial
investors to make good or bad decisions, Sullivan (2011) studied financial investors’
emotions when making investment decisions. Good investment decisions mean investors
39
made decisions that led to increased investment returns and reduced investment risks.
Bad investment decisions mean investors made investment decisions that resulted in
reduced profit and increased investment risks. Sullivan (2007) found that investors were
distracted by their emotions, which prevented them from making good financial
investment decisions. The results suggested that investors’ emotional feelings influenced
their investment decisions (Sullivan, 2007). Sillivan’s (2007) findings are consistent
with Gambetti and Giusberti (2012) and Myeong-Gu and Barrett’s (2007) findings that
investors who had happy and excited emotions made good investment decisions.
Conversely, investors who showed emotions of sadness and depression made irrational
decisions that resulted in losses (Sullivan, 2011). In another study, in order to investigate
the influence of emotions on investment decision-making, Chu, Im, and Jang (2012)
examined the effects of investors’ emotions such as pride and shame on their investment
decision-making. The findings showed that investors who demonstrated high pride traded
greater volume of investments. This was because investors with pride disregarded selfcontrol since responding to losses and modifying trading behaviors created the
impression of shame among the investors. Investors who showed pride made unguarded
investment decisions that resulted in losses. Conversely, investors who demonstrated the
emotions of shame made rational decisions through careful deliberation, which resulted
in increased returns.
To explore the influence of emotions on investment decision-making in London,
Fenton-O'Creevy, Soane, Nicholson, and Willman (2011) investigated how regulated
emotions and unregulated emotions influenced financial investors’ decisions in four
investment banks in the City of London, an area within London. In regulating emotions,
40
financial investors critically analyzed their emotions and financial information available
to them before making investment decisions. On the contrary, in unregulated emotions,
the investments decisions were made without thoroughly evaluating their emotions.
Semi-structured interviews were used to collect data from 118 investors who either
engaged in financial products (e.g., bonds, stocks, or derivatives) trading, property
trading, or both financial products trading and property trading in addition to 10 senior
financial managers. Fenton-O'Creevy et al. (2011) found that investment returns of
investors who used antecedent-focused emotional regulation performed better than those
who employed response-focused strategy. Investors who used antecedent-focused
regulation critically analyzed their emotions and financial information available to them
before making investment decisions, thus making rational investment decisions.
Conversely, the investments of investors who relied primarily on response-focused
regulation without evaluating their emotions performed poorly. This showed that when
investors carefully analyzed their emotions and financial information, they were able to
make rational investment decisions.
In assessing the influence of emotions on investors’ decisions to undertake direct
foreign investment (DFI), Van de Laar and de Neubourg (2006) analyzed the influence of
emotion and economic variables on Dutch investors who made DFI in Central and
European markets. Emotions were included in a utility maximization model that
considered not only the utility of the firm but also the utility of the individual decisionmaker. The findings showed that when the Dutch financial investors had positive
emotions, investors increased volume of DFI transactions in the Central and Eastern
Europe. Consistent with Gambetti and Giusberti (2012) and Myeong-Gu and Barrett
41
(2007), Van de Laar and de Neubourg’s findings showed that the variations of financial
investors’ emotions influenced their investment decision-making positively or negatively
depending upon their mood at the time of making investment decisions.
Investors’ emotions and financial decision-making are integrated and
interdependent on one another (Paulus & Yu, 2012). The investors’ emotional feelings in
fast-changing financial times make investment decisions difficult for financial investors
(Paulus & Yu, 2012). In order to understand how financial product price fluctuations may
influence emotional changes among financial investors Lo and Repin (2002) conducted a
study on financial professionals. A total of 10 financial investors were observed for
emotional factors, such as sweating and palpitation during financial investment decisionmaking. Results showed that financial investors demonstrated increased sweating and
palpitation when the price fluctuations were unstable. Lo and Repin’s findings showed
that when investors were making difficult financial investment decisions, investors’
emotions significantly influenced their decisions. Lo and Repin’s (2002) findings were
consistent with Lee and Andrade (2015) and Reye’s (2006) findings that investors’
psychological factors influenced their investment decisions.
To understand the influence of emotions on decision-making, in an audit-type
environment, Blay, Kadous, and Sawers (2012) examined how undergraduate students’
negative or positive emotional feelings influenced their behaviors in searching for
financial information. Blay et al. (2012) investigated how participants’ emotional
feelings about and levels of investment risks influenced their decision to search for more
or less financial information. Blay et al.’s (2012) findings showed that when the risk was
high, participants with negative emotional feelings demonstrated higher strategic search
42
behaviors compared to when the risk was lower. On the contrary, students who showed
positive emotional feelings showed lower strategic search behaviors when the risk was
low. The results show that people’s emotions, whether positive or negative, influenced
their decision-making. Blay et al.’s (2012) findings are consistent with Reyes’ (2006)
findings that investors’ emotional feelings influenced their financial investment
decisions.
Behavior financial researchers suggest investors’ psychological behaviors may
influence their decisions (Sahi, Arora, & Dhameja, 2013). In an explanatory design, Sahi,
Arora, and Dhameja (2013) investigated how investors’ psychological behaviors
influenced their investment decisions. In-depth semi-structured interviews were used to
collect data from 30 participants, who were residents in New Delhi, India. The qualitative
data collected was analyzed using the open analysis technique. The authors found that
investors’ emotions and psychological biases influenced their decision making. For
example, when participants’ emotional feelings about the investments were stronger, they
made increased and beneficial investment decisions. On the contrary, when the investors’
emotional feelings about the portfolios’ performances were weak, they showed disinterest
in making investment decisions. Interestingly, participants relied on information they
were familiar when making investment decisions instead of critically analyzing available
information. Psychological motives such as fear and greed influenced investment
decisions (Sahi et al., 2013). Respondents, who demonstrated fear during investing
decisions, made fewer but more beneficial investment decisions. On the contrary,
investors who showed greed during investment decisions traded more but made less
beneficial investment decisions. This demonstrates a pattern of psychological behavior
43
with regards to feeling about the portfolios’ performances when making decisions. Sahi
et al.’s (2013) findings were consistent with Blay et al.’s (2012) and Reyes’ (2006)
findings that investors’ emotions influenced their financial investment decision making
process.
Psychological factors such as depression and paranoid may influence decision
making process (Patterson & Daigler, 2014). To explore the influence of psychological
factors on participants’ decisions making, Patterson and Daigler (2014) surveyed 222
finance students. Using the S&P Trading Standard, in a thirteen-week stimulation
investment experiment, participants were assessed based on their risk taking behaviors.
The results showed that participants demonstrated a higher degree of paranoid traits than
average people. Participants diversified their portfolios in different investments but also
engaged in higher than average risk investments. The findings are important for investors
and financial managers to understand that self-monitoring during investment decision
making may help investors reduce taking higher risk while improving their returns on
investments. When investors’ decisions are predominated by paranoia characteristics,
they are likely to make less than optimal investment decisions (Patterson & Daigler,
2014). Consistent with Blay et al.’s (2012) findings, Patterson and Daigler’s (2014)
findings showed that financial investors’ emotions influenced their investments decisions.
Investment outcomes may influence investors’ psychological emotional feelings.
Haocheng, Jian, Limin, and Shuyi (2014) investigated the association between
investment outcomes and investors’ positive or negative emotional feelings. From six
universities, 115 undergraduate students were selected through a survey for the
experimental investment. Findings showed that participants demonstrated positive
44
emotional feelings when the price of their investment portfolios went up. On the contrary,
when prices of investment products fell, participants showed negative emotional feelings
(Haocheng, Jian, Limin, & Shuyi, 2014). The findings reveal that when price on stocks
go up, returns on investments increased and investors make profits on their invested
assets. This finding subsequently results in participants showing positive emotional
feelings. Conversely, investors would demonstrate negative emotional feelings when they
incurred losses as a result of a falling stock price. The Haocheng et al.’s (2014) finding
supports a cyclical nature of emotions, in that investor’s decisions are influenced by their
emotional status and then new emotions are generated by the outcome of those decisions,
influencing the new set of decisions.
Decision making is influenced by many psychological factors such as fear. In a
laboratory experiment, Lee and Andrade (2015) examined the effects of fears and
excitement about investment value on participants’ decision making in terms of risk
taking. In a stimulated investment environment, some of the participants’ experience of
fear was induced while other participants’ experience of fear was not manipulated.
Results showed that participants who had fear induced made less risky decisions
compared to participants whose experience of fear was not induced. On the contrary,
participants made risky decisions when the experimental environment was changed to a
casino game, participants with induced fear states made more risky decisions while
participants in the control group’s decisions remain unchanged. The findings by Lee and
Andrade (2015) explained that when participants were excited about the increase in value
of their investment portfolios, investors made more risky investment decisions. On the
contrary, when participants were fearful about the value of their investment portfolios,
45
investors made fewer risky investment decisions (Lee & Andrade, 2015). Lee and
Andrade’s findings are consistent with Reyes (2006) and Haocheng et al.’s (2014)
findings, which display that investors’ emotional feelings influenced their financial
investment decisions.
Numerous studies suggest that emotions play a role in investor behavior (Chu et
al., 2012; Myeong-Gu & Barrett, 2007; Shiv et al., 2005; Van de Laar & de Neubourg,
2006). Positive versus negative emotions appear to have various impacts on investor
behavior (Myeong-Gu & Barrett, 2007). Even different specific emotions, for example,
anger versus anxiety can lead to different investing behavior (Gambetti and Giusberti,
2012; Myeong-Gu & Barrett, 2007). Some research suggests that positive emotions lead
to increased beneficial investing behavior (Gambetti and Giusberti, 2012; Myeong-Gu &
Barrett, 2007). Other research has suggested negative emotions lead to more rational
investing behavior (Chu et al., 2012; Van de Laar & de Neubourg, 2006).
It is important for investors to be aware of and to factor the status of their
emotional state during investing decisions. Investors’ emotions differ from their
perceptions because while investors’ emotions refer to feelings which affect their
behaviors during investing decisions, investors’ perceptions, on the other hand, refer to
their ability to become aware of and process information through their senses during
investing decisions (Gambetti & Giusberti, 2012; Wang, Keller, & Siegrist, 2011).
Investors’ perceptions of benefits versus risks in the financial investment markets have
impact on their investing behaviors, in addition to emotions (Učkar & Carlin, 2011).
Influence of perception on investors financial decision-making. Researchers
have conducted numerous investigations to understand the influence of perceptions on
46
investors’ investment decision making (Wang, Keller, & Siegrist, 2011). Adequate
financial information and familiarity with financial products, as well as perception of
risk, may influence investors’ decision-making. In order to understand how investors’
perception of product risk and familiarity with product influenced their decisions, Wang,
Keller, and Siegrist (2011) examined investors in Switzerland. Using the psychometric
paradigm, the researchers surveyed 1249 participants from German-speaking Switzerland
and included 20 financial products in the study and examined how investors’ perceptions
of risks influenced their investment decision-making. Psychometric paradigm is an
analytical tool that is used to assess how non-experts perceive risk when making
decisions (Wang, Keller, & Siegrist, 2011). While 52% of the participants did not hold
portfolios, 45% held financial investments, and 3% refused to answer the question of
whether or not they have financial portfolios. Results showed that financial investors’
perceptions of low risk products were financial investments that were easy to understand.
On the contrary, when investors perceived information on financial products as
complicated, such financial products were rated as high risk. Wang et al.’s (2011)
findings showed some trend of anchoring bias, such that investors were open to only
familiar information and products when making investment decisions. Investors traded
more in familiar financial products that they understood better because they considered
those familiar products less risky than the unfamiliar financial products (Wang, Keller, &
Siegrist, 2011). Consistent with Jing, Chen, and Zhang’s (2013) findings, Wang et al.’s
(2011) findings showed that investors’ perceptions of familiarity with financial products
influenced their financial decisions.
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Psychological factors and perceptions may influence decision making processes
in corporations. To explore how psychological factors and perceptions affected investors’
venture capital value and their decisions, Jing, Chen, and Zhang (2013) studied venture
capitalists and entrepreneurs and their investment decisions. The authors investigated the
influence of moderate confidence and overconfidence on investors’ decision making.
Findings showed that participants with moderate confidence made sound investment
decisions. This means venture capitalist and entrepreneurs, who demonstrated moderate
confidence, made decisions that resulted in increased investment value. On the contrary,
participants who were overconfident made bad investment decisions, which resulted in
reduced investment value. The outcomes of this study showed that when individuals
making decisions have some confidence, the perception of confidence motivates people
to make beneficial decisions. However, investors who demonstrate overconfidence may
make more risky decisions that may subsequently result in increased investment risks and
reduced portfolio returns. Jing et al.’s (2013) findings were consistent with Wang et al.’s
(2011) findings that investors’ perceptions influenced their financial decision making
process.
Since risk is part of financial investment, investors consider several factors when
making financial investment decisions (Virlics, 2013). Some researchers have argued that
the more financial information that is available to investors, the better their chances of
making beneficial investment decisions (Virlics, 2013). In order to explore the influence
of financial information aggregation on investment decisions with regards to risk taking,
Kaufmann and Webber (2013) examined financial investors’ behaviors in an experiment.
Information aggregation is a phenomenon in which data are gathered and analyzed in
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order to make informed decisions (Kaufmann & Webber, 2013). In a higher aggregation
of information, a large volume of data are collected and analyzed to make decisions while
in a lower aggregation of information, a small volume of information is gathered and
analyzed to aid a financial decision process (Kaufmann & Webber, 2013). In a
hypothetical investment situation, participants in the control group received risky and
non-risky portfolios while respondents in the experimental group received information on
assets with and without investment risks. Results showed that when participants received
higher aggregation of information, investors made greater risk investment decisions. On
the contrary, when low aggregation of financial information was made available to
investors, they made less risky investment decisions. When investors’ perception of
investment risk is low, investors make higher risk investment decisions (Kaufmann &
Webber, 2013). The implication of the findings is that financial investors should analyze
information on returns and risks in small forms rather than in aggregate. Investors have
the tendency of exaggerating expected returns while underestimating risk investments
when financial information is evaluated in higher aggregate. This is because aggregated
financial information may lead the investors to make high-risk investment decisions.
These results display how cognitive limitations in managing financial information
influenced investors’ perceptions because they were not able to accurately interpret
higher aggregate information during decision making.
Understanding of how investors’ subjective perceptions of financial companies
influence their financial decision-making is of interest to behavioral finance researchers.
To examine whether investors’ perceptions of financial products and brands of
companies affected their decision making, Aspara (2013) investigated investors from the
49
Helsinki Stock Exchange, Finland. The author surveyed and examined 292 investors with
stocks in the automobile, gardening, and sport equipment companies. The results showed
when the investors’ highly regarded a financial product, the investors developed
familiarity with the product, which increased their preparedness to invest in those
companies. Investors’ familiarity of companies’ brands alone did not influence their
decision to invest in those companies. However, the investors’ perceptions of the
companies’ products increased their expectations of higher returns and subsequently their
optimism to invest in those companies. Aspara’s findings provided clarification to Jing,
Chen, and Zhang’s (2013) and Wang, Keller, and Siegrist’s (2011) findings that it is not
just the investors’ familiarity with company/brand that matters. It was the investors’
perception of the product that mattered (Aspara, 2013).
To understand the influence on investors’ behavior based on perceptions on the
stock market, Učkar and Carlin (2011) examined investors of the Croatian stock market.
An equilibrium model of the stock price movements and their respective fundamental
value was created to analyze the stock market data. The results showed that investors
who made investing decisions based on their perceptions, consistent with behavior
finance theory, incurred heavy short-term and medium-term losses. On the contrary, longterm stock prices tend to circle round the fundamental equilibrium with larger deviations
from the point of equilibrium. This means investors who critically analyzed financial
information and made decisions based on available financial information, improved their
returns on investments and reduced investment risks. When investors make financial
decisions based on their perceptions, less than optimal decisions were made, which
caused reduced profit and increased risk that subsequently reduced returns on
50
investments. The findings showed investors’ understanding of macroeconomics and
ambiguous financial markets and their influence not only on the financial sector but also
to the real economy may help in making good investment decisions. The findings indicate
that investors should analyze both the financial information and the information about
real economy (e.g., actual production of goods and services) in order to make beneficial
investment decisions. The authors suggested further research was needed to assess the
long-term impact of behavioral finance on the capital market. Učkar and Carlin’s (2011)
findings were consistent with Wang et al.’s (2011) findings, which showed investors who
made investment decisions based on their perceptions, rather than empirical results,
incurred heavy short-term losses.
To determine how perception of weakness in material control would influence
investors’ decision-making, Rose, Norman and Rose (2010) examined 97
nonprofessional investors in a first study, 53 nonprofessional investors in a second
research study, and 47 investors and 28 directors of Fortune 500 firms in a third survey.
Financial material control weakness arises when there are inaccuracies in the internal
financial reporting that is available to investors. As a result of the inadequate information
available to investors and deficiency in the internal reporting, when there are inaccuracies
in the company’s financial reporting, investors cannot promptly detect the inaccuracies
and the company cannot promptly prevent financial crises. The findings showed that
investors increased their investment risk assessment when their perception of material
weakness was more pervasive and they had distrust in management. Rose et al.’s (2010)
findings were consistent with Wang, Keller, and Siegrist’s (2011) findings that investors’
perceptions of investment risks influenced their investment decision making process.
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Financial crisis may affect investors’ decision-making based on how they
perceive and tolerate investment risks. In order to understand this effect, Roszkowski and
Davey (2010) examined the influence of current economic and financial crises on
financial investors’ perceptions of investment risks and tolerance for investment risks and
their subsequent investment decision making. Specifically, the authors studied investors’
investing behavior and if the 2008 financial crisis lowered the investors’ risk tolerance by
collecting data on their risk tolerance pre-and post-crisis inception. Using monthly
averages of risk tolerance scores, data from FinaMetrica between January of 2007 and
June of 2009 was collected and analyzed. Roszkowski and Davey found that before the
financial crisis, investors’ perceptions of risk were low and risk tolerance was high.
However, after the financial crisis, investors’ perceptions of risk elevated from low to
high and their risk tolerance changed from high to low. Consistent with Rose et al.’s
(2010) findings, investors’ perceptions of risks influenced their tolerance for investment
risk and subsequently their investment decision making.
In a related study, to understand investors’ investment behavior, Hoffmann, Post,
and Pennings (2013) investigated how the financial crisis from 2008-2009 influenced
investors’ perceptions of trading and risk-taking behaviors, by surveying investors in the
Tehran city of Iran. Between April 2008 and March 2009, the authors surveyed a panel of
brokers via email to answer survey questions online. The survey elicited information on
investors’ expectations of stock-market returns, risk tolerance, and risk perceptions for
each upcoming month. Results showed that 1,510 clients answered at least one
questionnaire, with an average of 539 clients answering each month, and a minimum of
296 in any given month. Hoffman et al. (2013) showed that during the financial crisis,
52
investors’ tolerance for risks and expectations for investment returns decreased
significantly while their perceptions of investment risks rose. For example, during the
worst months of the crisis, investors’ return expectations and risk tolerance decreased,
while their risk perceptions increased. Hoffman et al.’s findings were in line with
Roszkowski and Davey (2010) findings of investors’ reduced tolerance for investment
risk during financial and economic crisis.
In examining the stability of the financial markets, Harras and Sornette (2011)
explored the psychological factors that influenced the market bubble. The findings
showed that whenever investors have perceptions of positive feedback about investments,
investors invest more of their financial portfolios. On the contrary, when the investors
perceived negative feedback about investments, investors did not invest their financial
assets in those investments (Harras & Somette, 2011). Consistent with Rose et al. (2010),
the results demonstrated how investors’ perceptions of positive or negative feedback on
investments influenced how much they invest their financial portfolios.
The influence of investors’ perceptions of financial corporations’ performance or
regulatory risk on investors’ decision-making is of importance to researchers and
financial analysts. Chassot, Hampl, and Wustenhagen (2014) investigated how investors’
perceptions of regulatory exposure affected how investors make their financial
investment decisions in the renewable energy industry. Across the U.S. and European
financial markets, 29 investors who invested their portfolios in venture capital were
surveyed for the study. Research participants made 1,064 investment decisions with each
participant making an average of 36.7 investment decisions (Chassot, Hampl, &
Wustenhagen, 2014). Findings showed that investors’ perceptions of regulatory exposure
53
risk influenced their investment decision-making. For example, results showed that when
the venture capitalist investors perceived the regulatory exposure as high risk, they made
less investment decisions in the renewable energy companies. On the contrary, when the
venture capital investors perceived the regulatory risk as low risk, they invested more of
their portfolios. These results consistent with Harras and Somette’s (2011), and Rose et
al.’s (2010), and Wang, Keller, and Siegrist’s (2011) findings that investors’ perceptions
of investment risk influenced their investment decisions. The results of the study by
Chassot et al. (2014) underscored the importance of understanding investors’ perception
of investment corporations and their subsequent investment decision-making.
Investors’ perceptions of financial corporations’ strong checks and balances may
also influence how they make their investment decisions. Farkas and Murthy (2014)
explored how nonprofessional financial investors made investment decisions based on
their perceptions of strong continuous auditing (CA) and continuous control monitoring
(CCM) systems. In a two-part study, the authors first investigated 120 nonprofessional
investors from a national survey company and then 84 respondents from the Amazon’s
Mechanical Turk platform. The findings demonstrated nonprofessional investors did not
increase their investments even though they perceived the implementation of continuous
auditing would strengthen the control systems in the financial markets. Results from the
second survey showed that nonprofessional investors were disinterested in increasing
their portfolios investment. Investors’ perceptions of high cost CA and CCM discouraged
them from increasing their investment choices in spite of investors believing that the CA
and CCM controlled weaknesses in the financial system. This finding is a counterpoint to
54
Rose et al.’s (2010) findings because investors’ perceptions of strong accounting and
monitoring system alone did not influence them to increase their investment portfolios.
Investors’ perceptions of international investments and duration of holding
portfolios remain of interest to financial investments researchers (Harvey, Bolton, WilseSamson, Li, & Samama, 2014). To help understand and explore the investors’ perception
of cross-border investments and duration of holding invested assets before selling them,
Harvey, Bolton, Wilse-Samson, Li, and Samama (2014) examined chief investment
officers in financial corporations. Using a five-point Likert-type scale, participants were
asked to rate how likely the 20 identified item-contents would decrease their willingness
to invest across the border. Harvey et al.’s (2014) findings showed that perceptions of
regulations, whether formal or informal, was the highest ranked item that discouraged
investors from investing in cross-border countries. In addition to the cross-border
investments, the authors found that experienced investors held their portfolios in longterm investments. Harvey et al.’s (2014) findings indicated that holding portfolios in
long-term investments may increase returns and reduce risk.
Understanding of factors that influence investors’ perceptions in making
investment decisions and being satisfied with the decisions is of interest to financial
researchers. Hari and Ayappan (2014) examined what influenced investors’ perceptions
during investment decision-making, which subsequently led to satisfaction with their
investment selections. Using risklessness, returns, reference, investment choice and
analysis as variables, Hari and Ayappan tested whether analysis and reference had a
positive effect on investment choices or whether investment choices have positive impact
on risklessness and returns. While the return factor showed positive impact on
55
satisfaction, there was no influence of risklessness on satisfaction (Hari & Ayappan,
2014). This finding showed that the investors’ perceptions of positive returns on
investments significantly influenced their investment choices. Financial researchers
should attempt to understand what influences investors’ perceptions of portfolios and
their subsequent investment selections. Hari and Ayappan’s findings were consistent with
Rose et al. (2010), Harras and Somette (2011), and Wang, Keller, and Siegrist (2011),
whose findings supported that investors’ perception of investment risks influenced their
investment decisions.
Investors’ perception of financial corporation performance, social responsibility,
and corporate misconduct may influence the public view of the corporations in that
industry (Paruchuri & Misangy, 2015). To help understand investors’ perceptions and
generalization of corporate misconduct, Paruchuri and Misangy (2015) investigated how
investors’ perceptions of corporate misconduct influenced general public opinion of the
corporation. The authors examined 725 firms across U.S. financial markets with 84
financial misconducts. Using the cumulative abnormal return (CAR), results showed that
when investors have perception of misconduct in financial corporations, such perception
of misconduct is generalized to other corporations in the same financial industry creating
a ripple effect.
As demonstrated in Paruchuri and Misangy’s (2015) findings, investors
generalized perceptions of financial corporations’ conducts influenced other corporations
in the same industry. In another study, Hoffmann, Post, and Pennings (2015) investigated
if financial investors’ perceptions of financial corporations indeed translated to their
investment decisions. An online survey was conducted between March 2008 and April
56
2009 with participants recruited through email invitations. Research subjects were asked
to provide information on their perceptions of investment returns, risk tolerance, risk
perceptions for the subsequent month. Hoffmann et al.’s (2015) findings showed that
financial investors who perceived investment returns as having higher and upward
expectations invested more of their portfolios in such investments. The authors found that
investors who demonstrated high risk tolerance held riskier investments for longer
periods. Additionally, participants with higher risk perceptions had higher turnover than
their counterparts with lower risk perceptions of investment. Furthermore, financial
investors with higher revision of risk tolerance demonstrated higher buy-sell ratios than
participants with higher revision of risk perception who showed lower buy-sell ratios.
The finding is important for financial practitioners and researchers to understand how the
investors’ perception influenced their investment decisions. When investors had
perceptions of lower risk on investments, they made investment decisions of not only
trading more but also holding their portfolios for an extended period of time. Consistent
with Paruchuri and Misangy’s (2015) findings, Hoffmann et al.’s findings showed that
investors’ perceptions of investment risk influenced their investment decisions.
Research supports that investors’ perceptions play a significant role in investor
behavior (Hoffman et al., 2013; Roszkowski & Davey, 2010; Wang et al., 2011).
Perceptions, gain versus risk, seem to have different effects on investor behavior
(Hoffman et al., 2013). Different specific perceptions such as high investment risk versus
low risk can lead to different investing (Wang et al., 2011). Some research suggests that
gain perceptions lead to more beneficial investing behavior (Roszkowski & Davey,
2010), while other research has suggested that risk perceptions lead to rational investing
57
behavior (Hoffman et al., 2013). Perceptions of financial information have an impact on
financial investors’ decision making (Kaufmann & Webber, 2013). For example,
cognitive limitations in managing financial information influenced investors’ perceptions
because they were not able to accurately interpret higher aggregate information during
decision making (Kaufmann & Webber, 2013). Other research indicated that investors’
familiarity with company/brand, perception of corporation performance, and checks and
balances played significant roles in investment decisions (Aspara, 2013; Farkas &
Murthy, 2014; Jing, Chen, & Zhang, 2013; Wang et al., 2011). For example, familiarity
with company/brand caused investors to invest more of their portfolios (Jing, Chen, &
Zhang, 2013; Wang et al., 2011), whereas other research supported that it was the
investors’ perceptions of the product that mattered not just their familiarity with
company/brand (Aspara, 2013). Perceptions of a strong control system can lead to
checking financial weakness (Farkas & Murthy, 2014), while perception of misconduct in
one financial corporation is generalized to other corporations in the same industry
(Paruchuri & Misangy, 2015).
Gain versus risk perceptions lead to psychological bias which subsequently
impacts investing behavior. For example, research suggests anchoring bias can lead to
more irrational investing behavior because the investor ignores other information in favor
of familiar information (Rose et al., 2010; Wang et al., 2011). Bias occurs when investors
make decisions based on familiar information, products, or preferences without carefully
considering information on unfamiliar products which may lead to less than optimal
outcomes (Hon-Snir, Kudryavtsev, & Cohen, 2012). It is important for investors to
carefully analyze their biases before and when determining investment decisions.
58
Influence of psychological bias on investors financial decision-making.
Numerous behavioral finance researchers have investigated the effects of psychological
biases on investors’ decision-making. Lai, Chen, and Huang (2010) examined effects of
psychological biases on technical trading signals among investors in the Taiwan Stock
Exchange (TSE). Their findings showed that due to anchoring bias, investors broke-out
rules regarding financial trading and thereby traded more. Anchoring bias continues to
influence financial investors’ decision-making processes, regardless of the value of the
financial information available to investors (Chaarlas & Lawrence, 2012). Like Chaarlas
and Lawrence (2012), Gupta and Banik (2013), Lai et al. (2010), and Mitroi (2013)
examined how psychological bias influenced investors’ decision-making in the
Bangladesh financial market. The researchers surveyed 220 participants who were
involved in financial investment. Gupta and Banik’s findings showed that 95% of
respondents demonstrated anchoring bias. These findings were consistent with Chaarlas
and Lawrence’s (2012) findings which may help to understand the perceptions and
emotions of anchoring bias among the U.S. investors continued use of geographical
diversification strategy. This means that investors’ investment decisions are influenced
by their familiarity with financial products and strategies (Chaarlas & Lawrence, 2012).
To understand how psychological bias influences investors’ decision-making,
Hon-Snir, Kudryavtsev, and Cohen (2012) studied managers of investments and
individual investors. The study surveyed 300 individual financial investors and 41
managers of financial investments to assess the influence of psychological bias on
investment decisions. Utilizing a five-point Likert-scale, the authors examined how
investors’ psychological bias influenced their financial investment decisions in the Israeli
59
financial market. In recruiting individual investor participants, the researchers invited
qualified and interested participants by posting the online survey to one of the major
Israeli financial websites. Participants who were managers of financial investments were
contacted directly for participation. Results showed that both investment managers’ and
individual investors’ decisions-making were influenced by psychological bias.
Interestingly, investment decisions of individual financial investors with the most
experience were less influenced by psychological bias (Hon-Snir, Kudryavtsev, & Cohen,
2012). Hin-Snir et al.’s (2012) results suggest that less experienced investors’ decisions
are most at risk for psychological bias, as the impact of bias goes down as experience
increases. Hin-Snir et al.’s (2012) findings were consistent with Gupta and Banik’s
(2013) findings that investor’s psychological bias influenced their investment decisions.
To understand the effect of financial literacy and behavioral biases of financial
investment decisions, Ateş, Coşkun Şahin, and Demircan (2016) investigated the
influence of financial literacy on the behavioral biases of individual stock investors from
Borsa Istanbul market. Ates et al. (2016) examined the behavior biases of 596 individual
stock investors and the relationship between financial literacy and behavioral biases. The
results showed that there was a significant relationship between a number of other biases
and the level of financial literacy. Specifically, the results showed that approximately
50% of the investors with low financial literacy level demonstrated a high level of
behavioral biases in their decision-making compared with investors with high financial
literacy level. Ates et al.’s (2016) findings were consistent with Gupta and Banik’s
(2013) and Hin-Snir et al.’s (2012) findings that investors psychological bias influenced
their investment decisions. The implication of this result is that behavioral biases
60
influenced investors’ investment decisions. Similarly, the result indicates that depending
on informal financial information may result in making non-beneficial financial decision.
In an attempt to suggest strategies to overcome biases among behavioral finance
investors, Chaarlas and Lawrence (2012) conducted a survey among equity investors in
India. Chaarlas and Lawrence (2012) found that 81% of participants made investment
decisions based on anchoring bias of their familiarity with financial information. Results
showed that when investors are more familiar with specific financial information and
anchored to that information, the investors were more likely to increase their worth if a
rise in the prices of such investments occurred. On the contrary, if the prices in such
investments fell, the investors were more likely to incur losses because they
underestimated the fall in the prices due to anchoring bias (Chaarlas & Lawrence, 2012).
In order to overcome biases in investment, financial investors should critically analyze
information and figures in the financial markets, as opposed to basing their decisions on
little familiar financial information (Chaarlas & Lawrence, 2012).
To explore factors that influence behavioral bias, Tekçe, Yılmaz, and Bildik
(2016) investigated behavioral biases among Turkish individual stock investors during
2011. Tekce et al. (2016) examined how common disposition effect, familiarity bias,
representativeness heuristic, and status quo bias affected overconfidence and return
performance. The authors found that biases were common among investors (Tekce et al.,
2016). Results showed that familiarity bias had a nonmonotonic effect on investment
returns. This means that lower levels of familiarity bias resulted in lower investment
return, while higher levels of familiarity bias produced higher investment returns (Tekce
et al., 2016). The findings showed that overconfidence was positively correlated with
61
familiarity bias (Tekce et al., 2016). This shows that investors with higher levels of
familiarity bias were more confident about their investment decisions than investors who
demonstrated lower levels of familiarity bias. Tekce et al.’s (2016) findings were
consistent with findings from Chaarlas and Lawrence (2012), which showed that
investors familiarity bias did not only influence their investment decision but also
investors with higher levels of familiarity bias were more likely to increase their
investment worth compared to those with lower familiarity bias.
Different forms of psychological tendencies may influence how people make
decisions. Pandit and Ken (2014) investigated how participants’ psychological tendencies
influenced their investment decision making with regards to postponement of buying
shares. Psychological tendencies are cognitive biases which influence the way people
think and demonstrate behavioral bias in one way or the other during decision making
(Pandit & Ken, 2014). For example, when investors have more knowledge of a particular
financial product, they are more likely to have psychological tendencies towards that
particular product and purchase more shares of the product. From the Indian stock
exchange, 250 investors were surveyed and analyzed using regression analysis. An
illusion of knowledge occurs when the financial investors believe they know more about
a particular financial product than they actually do know about the product. For example,
the investors’ illusion of knowledge influenced their decision on postponing buying of
shares. When the degree of illusion of knowledge was large, investors bought fewer
shares. Conversely, investors purchased more shares when the extent of illusion of
knowledge was small. Risk propensity is the extent to which investors are willing to take
chances regarding risk of losing investment worth during investment decisions (Pandit &
62
Ken, 2014). Therefore, higher risk propensity means the investors are willing to take
higher chances of risk of loss when making investment decisions. Higher risk propensity
influenced investors to buy fewer stocks and postpone purchasing more shares. However,
in diversified portfolios, higher risk propensity did not influence participants from buying
more shares. The implication of findings is that when investors believe they have
adequate knowledge and information on the shares, they would make more purchases of
shares and less postponement of buying shares. On the contrary, investors would make
fewer purchases of shares and postpone more purchasing of shares when their knowledge
on the shares is less.
Research suggests psychological bias influenced investors’ decision making
processes (Ates et al., 2016; Chaarlas & Lawrence, 2012; Gupta & Banik, 2013; Lai et
al., 2010; Mitroi, 2013; Tekce et al., 2016). For example, anchoring bias led investors to
go against investment rules and regulations (Chaarlas & Lawrence, 2012). As many as
95% of investors demonstrated anchoring biases while making investment decisions
(Gupta & Banik, 2013). Other research indicated that while psychological bias influenced
investors decisions, the more experienced the investors are, the less likely they were at
risk for psychological bias (Hon-Snir, Kudryavtsev, & Cohen, 2012). It is essential for
investors to critically analyze their emotions, perceptions, and psychological bias when
making investing decisions. While the behavioral finance studies provided insight into
how investors’ emotions, perceptions, and psychological biases have influenced their
decision-making, some limitations of these studies need to be addressed.
Problems and Limitations of the Previous Studies
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The major problem confronting MPT investment strategy is the overinternationalization of financial markets that makes it difficult to effectively differentiate
domestically and internationally diversified financial investments. Unlike Solnik (1974)
and Srivastava (2007), who found the strategy to be effective in increasing returns and
reducing risks, other research observed the effects of globalization have diminished the
benefits of geographical diversification (Bobillo et al., 2008; Chu-Sheng, 2010; Gocmen,
2010; Raju & Khanapuri, 2010; Singh et al., 2010). The introduction of the EURO
currency, into the European financial market, has further diminished the effectiveness of
geographical diversification by increasing the interdependence among the European and
U.S. financial markets (Kashefi, 2006). Interestingly, some supporters of geographical
diversification strategy, such as Maldonado and Saunders (1981), Raju and Khanapuri
(2010), and Singh et al. (2010) found that the interdependence of global financial
markets, where a financial crisis or boost in one continent influences other continent(s), is
making geographical diversification strategy less attractive to investors. However, the
limitation is that the globalization of financial markets that has rendered the strategy
ineffective has not been critically examined and explained to investors to discourage
them from using the strategy (Maldonado & Saunders, 1981; Raju & Khanapuri, 2010;
Singh et al., 2010).
Investors may find it difficult to recall their emotions while making investment
decisions when later questioned (Fenton-O'Creevy et al., 2011). This action is common
among studies investigating the influence of emotions and perceptions on investment
decisions. For example, Fenton-O'Creevy et al. showed that investors’ ability to
accurately recall their emotions during investment decisions posed threats to the overall
64
outcome of the research. Therefore, utilizing numerous data collection techniques such as
open-ended interviews and self-reporting journals may help address the investors’
difficulty in recalling their emotions when making investment decisions. Open-ended
interviews may allow participants enough time and space to remember and record their
emotional feelings during investment decisions, which may not be available when using
closed-structured interviews (Sherry, 2008; Stake, 1995; Yin, 2003, 2014). Additionally,
keeping self-reporting journals, at the time of decision-making, may help participants
remember their emotions during investment decisions. A self-reporting journal is a
valuable technique for collecting reliable information using a qualitative design,
including when conducting case study (O’Connor, 2013; Yin, 2003, 2014). Therefore,
using both interviews and journaling to collect data may help the researcher obtain
information that participants might have difficulty recalling if interviews alone had been
utilized (O’Connor, 2013).
The studies that have examined how investors’ emotions, perceptions, and
psychological biases influenced their investment decisions have not always investigated
U.S. investors or investors directly. For example, Fenton-O'Creevy et al. (2011)
examined investors in London and Van de Laar and de Neubourg (2006) analyzed the
Dutch investors. Furthermore, Wang et al. (2011) investigated how perceptions of
investment risks affect investors’ investment decision-making in the German speaking
area of Switzerland and Hoffman et al. (2013) studied how investors’ perceptions of
trading and risk-taking influenced their investment behaviors in Iran. In addition, some
previous studies that examined the influence of investors’ emotions, perceptions, and
anchoring biases on investment decisions focused on financial planners and financial
65
corporations instead of the individual investors (Harvey et al., 2014). In order to
effectively assess how investors’ emotions, perceptions, and anchoring biases influence
their decision making, most of the participants should be individuals who conduct the
investment activities (Chassot et al., 2014; Hin-Snir et al., 2012; Hoffman et al., 2013;
Wang et al., 2011).
The major problem with the MPT investment strategy is that due to the
globalization of the financial markets, the benefits of the strategy have drastically
diminished, or erased, which makes the strategy less attractive (Maldonado & Saunders,
1981; Singh et al., 2010). One of the limitations of behavior finance studies is that
investors have difficulty recalling their emotions during investment decisions (FentonO'Creevy et al., 2011). The difficulty in recalling emotions during investment decisions
makes it difficult to obtain accurate information (Fenton-O'Creevy et al., 2011). Another
limitation is that the previous research conducted by Harvey et al. (2014) focused heavily
on financial planners and corporations instead of the individual investors. Emotional
feelings of fear and excitement about investment value influenced investors’ decisions
differently (Lee & Andrade, 2015). Investors who demonstrated fear made less risky
decisions, while those who were emotionally excited about portfolio value made more
risky investment decisions (Lee & Andrade, 2015).
Summary
While some research has supported the diversification strategy for increasing
returns and reducing risks, other research did not support the diversification strategy. For
example, Solnik (1994) and Srivastava (2007) found the strategy of geographical
diversification effective in increasing returns and reducing risks, while other research did
66
not (Bobillo et al., 2008; Chu-Sheng, 2010; Gocmen, 2010; Raju & Khanapuri, 2010;
Singh et al., 2010). The differences in outcomes of geographical diversification strategy
among the advocates of conventional finance theory have prompted interest in
understanding the investors’ behaviors with regards to using a strategy.
Understanding investors’ behaviors is important because psychological factors
such as perceptions, emotions, and psychological biases influence their investment
decision-making processes, which subsequently influences the health of the financial
markets. For example, Gambetti and Giusberti (2012) found that investors who
demonstrated anger emotions made more risky and less profitable investment decisions,
while investors with anxious emotions made less risky and more profitable investment
decisions. Investors’ perceptions of investment risks influenced their willingness to invest
or not to invest in a particular financial product (Gambetti & Giusberti, 2012). In times of
financial crises, investors’ perceptions of risks increased which decreased their
willingness to invest in such financial markets (Hoffman et al., 2013). Investors’
perceptions of corporate strong checks and balances (Jing, Chen, & Zhang, 2013; Wang,
Keller, & Siegrist, 2011), familiarity with company/brand (Aspara, 2013), and product
quality influenced their investment decisions (Aspara, 2013). Anchoring biases
influenced investors’ decisions during investment decision-making when they invested
only in familiar products (Gupta & Banik, 2013; Lai, Chen, & Huang, 2010).
The benefits of MPT strategy have diminished due to globalization of the
financial markets, which should make the strategy less attractive to investors; yet,
investors continue to use this strategy (Raju & Khanapuri, 2010; Singh et al., 2010).
Investors continue to use the geographical diversification strategy to increase investment
67
returns and decrease investment returns in spite of empirical evidence. Positive versus
negative emotions, perceptions, and biases play a role in investor behavior, which can
lead to different investing behavior. Since investing decisions based on psychological
factors lead to different investing behavior, it is important for investors to become of
aware of and be cognizant of their perceptions, emotional state, and biases during
investing decisions (Hoffman, 2013; Lai et al., 2010).
68
Chapter 3: Research Method
The 2008 financial crisis showed that investors’ continued use of the modern
portfolio theory (MPT) strategy of geographical diversification, as an investment
strategy, may not be supported by evidence (Smith & Harvey, 2011). The 2008 financial
crisis that resulted in increased cost, decreased returns, and increased risks (Bobillo,
Iturriaga & Gaite, 2008; Chu-Sheng, 2010; Gocmen, 2010) calls for expanded
understanding of investors’ behaviors. The purpose of this qualitative case study was to
explore U.S. financial investors’ perceptions and emotions regarding their continued use
of geographical diversification, as an investment strategy, to increase investment returns
and decrease investment risks, when empirical evidence (Bobillo et al., 2008; Chu-Sheng,
2010; Gocmen, 2010) does not support the use of the strategy. The following research
questions provided direction for the case study:
Q1. How do U.S. investors describe their emotions about using geographical
diversification as an investment strategy?
Q2. How do U.S. investors describe their perceptions of geographical
diversification as a strategy for increasing investment returns?
Q3. How do U.S. investors describe their perceptions of geographical
diversification as a strategy for reducing investment risks?
Q4. How do U.S. investors explain their use of geographical diversification
strategy, in the context of literature, which does not support the strategy?
This qualitative single case study was outlined in the following sections. The
sections included detailed information on the study population, sample, and instruments
in the study. In addition, the data collection process and analysis, assumptions,
69
limitations, delimitations, and ethical assurances for the study are also discussed in this
chapter.
Research Design
A qualitative case study was appropriate to elicit detailed responses on investors’
perceptions and emotions about geographical diversification as an investment strategy
(Ahrens & Chapman, 2006; Patton, 2002). The single case study design is appropriate
for this research because this design was used to obtain in depth information on investors
at a particular point in time (Patton, 2002; Stake, 1995; Yin, 2003). The case that was
investigated is the investors’ emotions and perceptions and each investor was a unit of
analysis. This design enabled the researcher to explore investors’ perceptions and
emotions of the investment strategy through using semi-structured interviews. For
example, the qualitative case study allowed research participants to describe, in detail,
their investing experience in their own words (Cozby & Bates, 2012; Creswell, 2009).
Other research designs were considered but not selected. The ethnography design
studies an entire group with shared common interest over several months or several years
(Zenker & Kumoll, 2010). For example, an ethnographical design explores people and
their cultures from the participant’s point of view (Zenker & Kumoll, 2010). The
phenomenological study explores the meaning of an event requiring the researcher to be
immersed in the study settings (Giorgi, 2009; Yin, 2003). The researcher must then
directly observe the participants to obtain data and translate into research in a
phenomenological design (Giorgi, 2009). In a case study, the researcher does not have to
be immersed in the daily life of the participants in order to obtain the data (Leedy &
Ormrod, 2010). Through using case study design, utilizing interviews and journaling, the
70
researcher obtained detailed information at one time point. Therefore, the case study
design was appropriate for this study because it helped the researcher explore the
research participants’ behaviors, perceptions, and emotions related to the investment
strategy (Giorgi, 2009; Yin, 2003, 2014).
Quantitative methodology uses close-ended questions and depends on measures to
elicit and quantify variables (Hunter & Leahey, 2008). Using a quantitative method,
which collects numeric data, would not have allowed participants to provide detailed
descriptions of their emotions and perceptions of the investment strategy (Hunter &
Leahey, 2008). The quantitative methodology was not pursued because it was not
considered the best approach for the study’s purpose. The qualitative method, however,
offers the opportunity for the researcher to deduce meaning from the descriptive data
through building themes and drawing conclusions from the findings (Flick, 2007). To
obtain information on the investors’ perceptions and emotions about an investment
strategy, which was the purpose of this study, a qualitative approach was deemed as more
appropriate. Triangulation in a qualitative study is a process of using multiple approaches
in data collection or analysis to improve the research outcomes (Patton, 2002). The
various types of triangulation include data triangulation, theoretical triangulation, method
triangulation, and investigator triangulation (Patton, 2002). Data triangulation obtains
multiple sources of data within the same method for the purpose of comparison for
similarities or differences (Patton, 2002). Method triangulation uses multiple methods,
usually both quantitative and qualitative to collect the data (Patton, 2002). Method
triangulation was not appropriate for the study because rich data on participants’
perceptions and emotions requires a qualitative approach. Both theoretical and
71
investigator triangulations were not appropriate because they require a third party to
interpret and analyze the data which may be a violation of the independent work of the
dissertator.
While triangulation may be used in qualitative study, simultaneous use of multiple
types of triangulation is not a requirement in qualitative designs (Golafshani, 2003).
Triangulation does not suggest a specific method for qualitative study (Golafshani, 2003;
Guion, Diehl & McDonald, 2011). Obtaining data from participants who are not
investors may result in data that are not related to the purpose of the study, threatening
the validity of the study results (Baxter & Jack, 2008).
According to Seidman (2005), when data are obtained by employing multiple
techniques from different sources, a study produces richer data and results. This study
used a data triangulation approach to gather multiple sources of information from the
participants. In addition to using semi-structured, open-ended interviews, via in-person or
by telephone, journaling was used to obtain additional data from the investors. Journaling
being a form of documentation is a valuable source of collecting reliable information in a
qualitative design, including a case study (O’Connor, 2013; Yin, 2003). Using interviews
and journaling to obtain data allows the researcher to obtain information that participants
may have difficulty recalling if an interview alone had been used to gather data
(O’Connor, 2013). In order to explore the perspectives of retired or near-retired U.S.
investors seeking information and use behaviors, O’Connor (2013) utilized interviews
and journaling to obtain subjective data from the participants. Obtaining data using
multiple techniques ensures that the credibility, transferability, and trustworthiness
requirements are improved (Shenton, 2004).
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Population/Sample
Financial investors over the age of 18 years in the Washington DC Metropolitan
Area who geographically diversified their financial investments were the targeted
population for the study. The Washington DC Metropolitan Area included Washington
DC, Northern Virginia, some counties in Maryland, and Jefferson county in West
Virginia. The Washington DC Metropolitan Area is an appropriate context for this study
because investors in this area are likely to geographically invest their financial assets.
Professionals who currently worked or resided in the Washington DC Metropolitan Area
may have come from many different states and therefore were more likely to be a good
representation of all U.S. investors. In addition, the proximity of the location in relation
to the researcher’s residence made the Washington DC Metropolitan Area readily
accessible for the researcher to conduct in-person interviews with participants. Financial
investors who were members of Academia.edu, Facebook, LinkedIn, Meetup, and
Meettheboss social networks were initially targeted as the study population. As of 2015,
these five social networks have a combined estimated 650,000 members in the study area.
Snowball sampling was also used to recruit as qualified interested participants were asked
to inform anyone who meets the selection criteria about the study, so that might have
extended the population beyond these social networks.
Fourteen participants from the population in the Washington DC Metropolitan
Area were purposely recruited for the case study. Over-recruitment was used in order to
allow for attrition and data saturation (Stake, 1995), even though the planned sample size
was 10 to 12 participants. Ten participants completed the interviews and journal entries
and were finally included in the study. Two participants completed the interviews but did
73
not return any of the three journal entries, one participant completed one-half of the
interview questions but decided to quit and one participant dropped out without taking
part in the interview or journal entry. Purposeful sampling ensures that a focused sample
is represented in the study and also ensures that the researcher collects appropriate data
for the study (Robinson, 2014; Yilmaz, 2013). Participants who were 18 years or older,
diversified their financial investments across different geographical areas, and resided or
worked in the Washington DC Metropolitan Area were purposely selected for the study.
The data that were gathered from these individuals was appropriate to answer the
research questions because it provides the researcher insight into how participants’
perceptions and emotions of geographical diversification strategy influence their
investment decision process. A case study design requires that in-depth information is
obtained, which makes the process extremely difficult to include a large sample (Patton,
2002). According to Patton (2002) and Stake (1995), the recommended sample size for a
case study is between eight and 12 participants (Patton, 2002; Stake, 1995), thus the
sample size of 10 was well within the recommended sample size of a case study to ensure
credibility and transferability of a case study results. Data saturation is achieved when the
researcher does not obtain new themes or discovers new information (Brinkmann &
Kvale, 2005; Kvale & Brinkmann, 2009). Data saturation has the potential to increase the
transferability of the study findings (Shenton, 2004). After the 10th participants who
completed the interviews and journal entries, no new themes were being discovered, so
data saturation was achieved with the 10th participant.
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Materials/Instrumentation
This study used various instruments to gather data for analysis. Open-ended semistructured interviews, in person or via telephone, and journaling prompts were the
instruments used to collect participants’ responses. Another important instrument in the
study was the researcher. The researcher’s impact on the study outcomes was immense
because in developing and applying the instruments, the researcher collects, analyzes, and
interprets the collected information. It was therefore important to make sure that the
instruments utilized are appropriate to collect rich data and subsequently ensure
credibility, confirmability, dependability, and transferability of the research outcomes
(Robinson, 2014; Yilmaz, 2013). The researcher engaged two individuals known to him,
who meet inclusion criteria, to review the interview questions and journaling prompts as
part of enhancing the quality of the research outcomes through the use of field-testing.
The rationale for conducting this field test was to make sure the questions were
interpreted how the questions were planned, which would assist in obtaining the
appropriate information from participants (Shenton, 2004). The interview questions and
journaling instructions were modified based on the responses from the field test. Shenton
(2004) recommends the use of field testing to ensure that interview questions were
interpreted how they were intended in order to obtain the appropriate information from
participants to help improve the quality of research outcomes. Each instrument is
described in the following subsections.
Interview questions. This case study required participants to complete a set
interview questions either in person or via phone. Research questions were used as
guidelines for the development of the interview questions (Sherry, 2008; Stake, 1995;
75
Yin, 2003, 2014; see Appendix H). The nature of qualitative design requires that the
interviews be conducted with outmost care to preserve the quality and accuracy of
responses (Patton, 2002). This means that the interview questions were clear, concise,
and open-ended but semi-structured to allow participants to express themselves in their
own words. Each question included one idea to ensure enhance easy of analysis (Patton,
2002). The open-ended semi-structured interview questions ensured that comparable
responses were elicited from participants for the purpose of standardization (Patton,
2002). At the same time, these open-ended interview questions were meant to obtain
responses that could create more questions depending upon the participant’s response and
subsequently bring themes into this analysis.
The first set of questions explored how the U.S. investors describe their emotions
about using geographical diversification as an investment strategy. The second set of
questions sought to obtain data on the description of U.S. investors’ perceptions of
geographical diversification, as a strategy for increasing investment returns. The third set
of questions explored how the U.S. investors describe their perceptions of geographical
diversification as a strategy for reducing investment risks. The fourth set of questions
asked participants to explain their use of geographical diversification strategy, in the
context of literature that does not support the strategy.
Journals. For the purpose of triangulation, journaling was also be used to collect
data. This study required participants to complete three journal entries of their feelings
during decision making, mood at the time of decision making, and thoughts during
decision making (see Appendix I) on a Microsoft word journal template provided to them
(see Appendix J). Journaling has been used to collect data in qualitative designs (Yin,
76
2014). To be able to effectively gather data on participants’ thoughts and experiences,
Kağnici (2014) used journaling to collect data.
Researcher. The researcher plays an important role in qualitative studies. The
researcher acts as an instrument in guiding the participants to provide their descriptive
response, without unduly influencing the participants. The researcher provided
clarification when necessary to help participants provide true reflection of their
experiences. The researcher may be considered to be in the powerful position when
interviewing participants (Glesne, 2011), which can lead to the participants providing
inaccurate information, which may affect the data and subsequently negatively influence
the study results (Glesne, 2011). It is important that the researcher ensures integrity at all
times to enhance the dependability and trustworthiness of the study outcomes (Brinkman
& Kyale, 2015).
The researcher’s background may introduce biases, which are acknowledged
below. While the researcher has not held a position as an economist, his undergraduate
degree in agricultural economics led him to believe that investors invest their assets to
optimize returns and reduce risks. As a Medical Director, who has managed a medical
practice for over five years, the researcher believes that risk reduction and profit
maximization are important in all for-profit investments. The paramount objective of
investment of any kind is to put resources to good use so as to increase outcomes
(Masron & Fereidouni, 2010; Resnik, 2010). The researcher’s belief that investors will
make decisions that they believe will result in increasing returns and decreasing risks
might influence how he perceives the participants’ description of their investment
decision making. In addition, the researcher has a belief that when investors are under
77
excessive stress they are more likely to make less than optimal decisions than when the
investors are calm and relaxed. The researcher’s background, experience, and beliefs
shape biases, which might potentially affect how he developed and conducted the
interview and how he analyzed the data collected. To help reduce the influence of
researcher position and biases, the researcher ensured that participants’ confidentiality
was maintained at all times (Glesne, 2011). In addition, the researcher demonstrated
reflexivity by keeping weekly entries of his values, interests, beliefs, and preconceptions
of the geographical diversification strategy in order to remind himself of possible biases
or preconceived positions (Lincoln & Guba, 1985). Furthermore, being conscious of the
researcher’ experiences, background, beliefs, and biases throughout his interactions with
the participants helped the researcher to obtain the true reflection of participants’
responses (Lincoln & Guba, 1985). Utilizing thorough documentation of the participants’
responses, such as using participants’ quotations and presenting detailed description of
responses, reduced the researcher’s biases, which helped enhance the dependability of the
research outcomes (Shenton, 2004; Williams & Marrow, 2009). Experience with and
good skills in interviewing participants and gathering data for analysis are important to
enhance the credibility, dependability, transferability, and confirmability of results
(Brinkmann & Kvale, 2005; Kvale & Brinkmann, 2009). A researcher’s knowledge of
ethical guidelines ensures the accuracy of the data and subsequently the dependability of
the research findings (Brinkmann & Kvale, 2005). The researcher maintained equal
partners’ environment between himself and the participant, during the interview, because
such an environment enables the interviewee to feel comfortable, which helps to increase
the accuracy of data (Brinkmann & Kvale, 2005). Creating an equal partners environment
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means the researcher and participant see each other as equal in the interview process
(Brinkmann & Kvale, 2005). Creating and maintain an equal partners environment were
achieved by recognizing the researcher’s own biases and respecting the participant’s
views and offering the participant enough room and time to think and answer questions.
To recognize the researcher’s own biases, he demonstrated reflexivity by keeping weekly
entries of his values, interests, beliefs, and preconceptions of the geographical
diversification strategy in order to remind himself of possible bias or preconceived
position (Lincoln & Guba, 1985). The researcher respected participants’ views by
maintaining personal space and asking appropriate questions, as approved by NCU’s
IRB, about participant perceptions and emotions regarding the use of the geographical
diversification as an investment strategy (Brinkmann & Kvale, 2005). In addition,
participants were given enough time (e.g., up to 90 minutes) and space (e.g., open ended
interview questions and journal entry template), to freely describe their opinions about
the strategy without unnecessary interruptions (Brinkmann & Kvale, 2005). Knowledge
of ethical guidelines requires that the researcher maintains integrity through constantly
recognizing his/her biases and be open about biases and measures correcting biases
(Kvale & Brinkmann, 2009). The semi-structured open-ended interview questions were
used to collect data where participants were allowed up to 90 minutes to answer the
interview questions. Participants were encouraged to ask for clarification when they
needed explanation(s) regarding the interview questions. The semi-structured open-ended
interview questions and up to 90 minutes to answer the interview questions provided the
environment for participants to provide narrative and true meaning of their responses,
which could enhance the accuracy of information (Brinkmann & Kvale, 2005).
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Incorporating feedback from the field test will help ensure that participants interpret
research questions how they were intended which will result in obtaining rich data.
Planning for a sample size on the large side based on recommendations for case study
will help in strengthening my interview skills and experience (Patton, 2002; Stake, 1995).
Study Procedures
Financial investors, who were members of the Academia.edu, Facebook,
LinkedIn, Meetup, and Meettheboss social networks, were the targeted groups for
participation. The researcher posted a recruitment notice (see Appendix A) on his
webpage, in the five identified social networks, which informed potential participants
about the study being conducted. Qualified interested individuals were asked to email the
researcher. After the interested individuals had contacted the researcher, the researcher
provided more study details and confirmed the inclusion criteria using the recruitment
and screening email response (see Appendix B), including attaching the informed consent
document (see Appendix C). Individuals who met inclusion criteria, as based upon
participants who were 18 years or older, diversified their financial investments across
different geographical areas, and resided or worked in the Washington DC Metropolitan
Area, received a participation confirmation email (Appendix D), with directions for
completion of the informed consent document. The researcher asked the individual
participants who requested to complete the interview by phone to print, sign, scan, and
email the informed consent back to the researcher or request his address to mail back a
hard copy of the informed consent to the researcher. The signed informed consent was
obtained prior to conducting the interview by phone. Individual participants who
requested to participate in the interview in person were asked to choose a public place for
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the in person interview. This was done due to availability of convenient interview space
and ensured that participants were comfortable for the interviews. The in person
interviews were conducted once the researcher had obtained a signed informed consent
document from the individual. The participation confirmation email was re-sent one day
prior to the scheduled interview to remind the interviewee about the interview
appointment, thus decreasing the likelihood of participants forgetting about the
interviews.
Interested individuals who did not meet the selection criteria received an email
(Appendix E) thanking them for their interest in the study. In all, thirty potential
participants initially expressed interest in participating in the study. After the 14th
qualified participants confirmed his/her eligibility, returned the signed informed consent,
and scheduled his/her interview date, the remainder 16 potential participants were
informed via email (Appendix F) that they had been placed on a waiting list. After the
tenth participant completed the interviews, along with the 3 journal entries, as required
for complete study participation, the researcher sent a thank you email notifying
participants of data saturation, as there were additional16 potential participants on the
waiting list (Appendix G). Each of the 16 potential participants, on the waiting list, were
offered the opportunity to receive a copy of the study findings, pending committee
approval.
In addition to purposeful sampling, snowball sampling, through which
participants helped to recruit new participants, was employed in the participants’
recruitment process (Salganik & Heckathorn, 2004). To utilize the snowballing
recruitment approach, participants were asked to notify anyone they knew who might fit
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the inclusion criteria for the study. Snowball sampling has been effectively utilized in
previous studies in which the researcher encounters difficulty in recruiting qualified
participants (Draper & Swift, 2011). The screening process, informed consent
requirements, and wait list notification processes utilized for participants recruited from
the five social networks was the same for participants recruited through snowball
sampling.
Data Collection and Analysis
In this case study, data collection was conducted over the duration of two months.
Participants responded to interview questions and completed three journal entries
examining perceptions and emotions regarding their continued use of geographical
diversification as an investment strategy to increase investment returns and decrease
investment risks, when empirical evidence does not support the use of the strategy. The
data were manually coded and thematized for analysis. The follow sections elaborated
how the data were collected, coded, and analyzed.
Data Collection. Interviews were used to collect data from participants, after they
signed the informed consent. After the interviews, each participant completed three
journal entries on the Microsoft word format provided and emailed their responses to me
as participants complete them each week. In order to ensure that participants complete the
journal entries, the researcher sent out reminders to participants on a weekly basis.
Semi-structured interviews using open-ended interview questions were conducted
either in person or via telephone to collect data from each participant and responses
recorded on a handheld recorder. The researcher personally transcribed the recorded data
to ensure accuracy of information. Kvale (2012) and Saldaña (2013) recommend
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transcribing data in small amounts, preferably with a pen/pencil and a piece of paper, to
get used to the work before transferring onto a computer. The transcribed responses were
emailed to participants for member validation. Each participant verified their transcribed
responses and no changes were requested by any of the participants. To ensure the
accuracy of data, the member validation is a useful technique (Kvale, 2012). The
transcribed interview responses were added to participant journal entries onto a password
protected Microsoft Word format. The researcher kept the recorded data onto a password
protected Microsoft Word format to ensure the safety of the data and the protection of
participants’ confidentiality (Kvale & Brinkmann, 2009).
Data Analysis. In this case study, I personally manually coded the data to
discover themes for the analysis. Themeing is appropriate for processing and analyzing
descriptive data, especially interviews and journals (Saldaña, 2013). In themeing, phrases
and sentences that provide meaning are identified and grouped in order to provide the
true meaning of the participants’ responses (Saldaña, 2013). Themes were identified and
written next to the data and the themes were then categorized after the similarities,
differences, or relationships within the data were considered.
The categorization of the themes helped the researcher appropriately process and
analyze the data (Saldaña, 2013). In analyzing the data, themes that emerged from the
data were organized to answer the four research questions (Saldaña, 2013). The themes
were identified at the manifest level (Saldaña, 2013). The identification of themes at the
manifest level means the themes were formed directly from observable data in the study
(Saldaña, 2013). While using multiple raters, such as different investigators, to analyze
the data set may improve the confirmability of the study outcomes, such approach is not
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feasible for the proposed study as the researcher does not have access to other
investigators qualified to conduct qualitative analyses and that technique could violate the
expectation that the dissertation is the original and independent work of the dissertator.
Stages 6 and 7. Multiple techniques were used to verify the quality of the study
results. Field-testing ensured the interview questions were designed to obtain the
appropriate data the researcher planned to collect. Recruiting participants from the five
social networks helped increased the transferability of the research outcomes.
The researcher obtained signed consent from participants before conducting the
interviews. In the informed consent, the researcher explained the details of the study
including the participants’ ability to quit the study without retaliation and how the
participants’ confidentiality would be protected. According to Brinkmann and Kvale
(2009) obtaining informed consent before interviews encouraged participants to provide
honest responses when they knew that their safety and confidentiality are protected. Each
potential data collection method has potential pros and cons. In person interviews may
impact participant feelings of comfort in either direction, while phone interviews may
present visual barriers (Shenton, 2004). Using data triangulation, the researcher obtained
data using in person or on phone interviews and journaling, which helped strengthened
the outcomes of this qualitative study through data triangulation (Shenton, 2004).
Member checking enabled the participants to verify and validate his or her responses to
ensure data accuracy (Kvale, 2012).
After themeing the data, the researcher reflected on the results and considered
rearrangement of themeing the data when necessary for accuracy. Direct quote responses
demonstrating participants’ own words related to their emotions of geographical
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diversification strategy, perceptions of geographical diversification strategy, and
perceived risk of geographical diversification strategy were reported in the results of this
study. Recruiting from the large population, from the five identified social networks and,
besides the interviews, using journaling to gather data from participants provided rich
data, which is key to the study outcomes’ transferability and dependability.
Assumptions
It was assumed that participants provided accurate information reflecting their
emotions and perceptions regarding their continued use of geographical diversification as
an investment strategy. The open-ended semi-structured interviews allowed participants
more time and free space to speak openly and honestly about their emotions and
perceptions. To obtain accurate data on subjective topics, an interview is most
appropriate (Brinkmann & Kvale, 2005; Kvale & Brinkmann, 2009) and using openended semi-structured interviews facilitated obtaining accurate information. Data
triangulation obtains multiple sources of data within the same method for the purpose of
comparison for similarities or differences (Patton, 2002). Data triangulation was used in
order to obtain accurate data, which represents a true reflection of the participants’
emotions and perceptions regarding the use of the strategy (Patton, 2002). This means in
addition to using semi-structured, open-ended interviews via in-person or by telephone,
journaling was used to obtain additional data from the investors. According to Yin
(2014), journaling is effective tool to corroborate data collected from other sources.
Informed consent was obtained from participants before conducting interviews, which
encouraged the participants to provide honest responses when they knew that their safety
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and confidentiality was protected (Brinkmann & Kvale, 2005; Kvale & Brinkmann,
2009).
Secondly, it was assumed that the researcher’s experience and biases might
impact data collection and analysis of participants’ responses (Lincoln & Guba, 1985).
This is because the researcher’s own experience in economics and bias about investors
making rations decisions to increase returns and reduce risks might influence how he
collected and analyzed participants’ data (Brinkmann & Kvale, 2005, 2015; Lincoln &
Guba, 1985). The researcher kept notes about his values, interests, beliefs, and
preconceptions of the geographical diversification strategy (Lincoln & Guba, 1985) to
consistently reminded himself about his bias and thus, allowed participants to do all of
the talking (Lincoln & Guba, 1985). The researcher audio-recorded participants
responses, asked approved interview questions, and did not interrupt while participants
were talking (Lincoln & Guba, 1985). Similarly, member checking was used where
participants verified and validated their responses to ensure data accuracy. Finally, direct
quotes of participants’ responses were reported in the results, which helped to reduce or
eliminate the researcher’s potential influence and bias on the research outcomes.
Limitations
The first limitation of the study was the ability to satisfy the transferability and
dependability requirements due to small sample size. According to Shenton (2004), a
case study, like any other qualitative design, faces constraints of meeting transferability,
confirmability, credibility, and trustworthiness issues (Shenton, 2004). Including 10
participants in this study to enhance the dependability and transferability of the study
outcomes minimized the sample size limitation. The recommended sample size of
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qualitative case study ranges from 8 to 12 (Patton, 2002; Stake, 1995). Additionally,
using member checking and direct quotes of responses, obtaining informed consent
before conducting interviews, and providing detailed description of participants’
responses helped enriched the study results to support transferability and dependability
(Kvale, 2012).
Another limitation of this study was the possible use of interviews via phone,
which may be a barrier to understanding nonverbal cues or result in missed signals. The
researcher asked participants to explain such as hand gestures, change in tones, and facial
expressions during the in person interviews. This potential missed signal limitation was
reduced when seven of the 10 participants, representing 70% of the respondents, selected
the in person interviews. Mealer and Jones (2014) and Siedman (2005) suggested that
interviews, via phone, can create a visual barrier and cause the interviewer to miss
nonverbal information.
Delimitations
The scope of the study was limited to U.S. investors who were at least 18 years
old, diversify their financial investments across different geographical areas, and reside
or work in the Washington DC Metropolitan Area. The findings of this study may not be
applicable or transferable to other investors in different countries due to dissimilarity of
emotions and perceptions of using geographical diversification as an investment strategy.
Ethical Assurances
Before recruiting and collecting data from participants, I obtained an IRB
approval from Northcentral University as required. IRB approval was important to ensure
the protection of participants that includes but is not limited to their confidentiality and
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safety (Brinkmann & Kvale, 2005; Kvale, 2012). Obtaining informed consent from
participants before the interviews were conducted and thus, assured participants of
protection of their safety and confidentiality (Brinkmann & Kvale, 2005; Kvale, 2012).
The identity of participants and the information they provided remained confidential
through de-identification and presentation of data by identifying participants only as
Participant A, B, C, etc. Before and after data were de-identified, the data, both
transcribed interviews and journal entries, were kept in a Microsoft Word format with a
password-protected on the documents.
While qualitative designs provide enough room for participants to speak freely,
the researcher did not ask manipulative (e.g., leading) questions, and thus only focused
upon the questions approved by NCU IRB (Brinkmann & Kvale, 2000). Additionally, the
researcher avoided asking personal questions, which would provide personal information,
thus, prevented crossing participant’s personal space (Turner, 2010). Since no research
design is without ethical concerns, field-testing was conducted to identify and correct
questions that might have presented ethical problems, including but not limited to asking
leading questions and crossing personal boundaries (Turner, 2010). Questions that sought
only to provide answers to the research questions were asked. Generally, interview
questions take more time to respond to than other sources of data collection like surveys
(Patton, 2002; Yin, 2003, 2014). Additionally, participants were asked to keep journal
entries of their emotional feelings, when they were making investment decisions, and
submit their journal entries to the researcher. Participants were made aware of the amount
of time they were expected to spend for participation in the interviews and self-reporting
journal aspect of the study.
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Summary
This qualitative case study was conducted to explore U.S. financial investors’
perceptions and emotions regarding their continued use of geographical diversification as
an investment strategy. A qualitative case study was most suitable to explore the
perceptions and emotions of U.S. investors using the geographical diversification
strategy. The rationale for selection of the case study design was that this design helped
explored the meaning of the investors’ perceptions and behaviors. Additionally, case
study design utilized in-depth semi-structured open-ended interviews to ensure that
research participants provided the necessary data when limited information exists (Yin,
2003, 2014). In addition to the interview, participants were asked to provide a journal,
three times in four weeks, during investment decision-making (O’Connor, 2013; Patton,
2002). The transferability, confirmability, credibility, and trustworthiness of the study
outcomes were strengthened by field testing, data triangulation, and a utilizing
recommended sample size as per qualitative research. These measures helped reduced
researcher bias and influence and improve interview techniques (Shenton, 2004).
The population of the study included financial investors in the Washington D.C.
metropolitan area, who geographically diversified their financial investments as an
investment strategy. Financial investors who were members of Academia.edu, Facebook,
LinkedIn, Meetup, and Meettheboss social networks were initially targeted as the study
population. Snowball sampling was also used to recruit, as qualified interested
participants were asked to inform anyone who meets the selection criteria about the
study. Purposeful sampling and snowballing sampling were used to recruit ten investors
who satisfied the research requirements. According to Patton (2002) and Stake (1995),
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the recommended sample size for a case study is between 8 and 12 participants (Patton,
2002; Stake, 1995), thus the sample size of ten was well within the recommended sample
size of a case study required to ensure credibility and transferability of case study results.
The assumptions made included that participants would provide accurate information
reflecting their emotions during investment decisions and perceptions of using
geographical diversification strategy, as well as that researcher influence and bias can be
minimized. Since open-ended semi-structured interviews and self-reporting journaling
were used responses were confidential, participants should feel comfortable and free to
provide a true reflection of their emotions and perceptions. Missing nonverbal signals
through obtaining data via phone interview and the study outcomes meeting
transferability and dependability requirements were the limitations of the study. To help
obtain quality data and produce rich research outcomes, participants had the option of
selecting in person interviews. IRB approval was sought and obtained from Northcentral
University prior to collecting data from participants. An informed consent was obtained
from each participant before conducting data collection. Obtaining informed consent
before collecting data encouraged participants to provide quality responses since the
participants knew their information and confidentiality were protected. Data for this
study was collected over the duration of two months during which participants were
interviewed and kept three journal entries of their emotions and perceptions when making
decisions. The data was manually coded and analyzed, and then categorized into themes.
Direct quotes of participants’ responses were used to present the results. Member
checking enabled the participants to verify and validate their responses to ensure data
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accuracy. Themeing has been used to process and analyze qualitative data with
descriptive responses (Kayle, 2012; Saldana, 2013).
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Chapter 4: Findings
The purpose of this qualitative case study was to explore U.S. financial investors’
perceptions and emotions regarding their continued use of geographical diversification as
an investment strategy. Chapter 4 comprises a reporting of the study’s results with the
themes that emerged from the data. This chapter is subdivided into four main sections.
The first section comprises trustworthiness of data where population, sample size,
procedure, and study design are briefly introduced. Organized by research questions, the
second section consists of the results from the study. Evaluation of findings forms the
third section, where findings from this study are explained and described in comparison
with existing literature. The fourth and last section of this chapter consists of the
summary of the discussion of the study’s results.
Trustworthiness of Data
Using purposive and snowballing sampling, the researcher collected data through
interviews in person or by phone and journaling from 10 investors, who lived or worked
in Washington D.C. Metropolitan Area and diversified their investments across different
countries. All participants submitted at least one journal entry. A total of 18 journal
entries were received from 10 participants documenting their perceptions and emotions
regarding geographical diversification as an investment strategy. This design allowed the
researcher to collect and analyze data from each participant in order to better understand
the investor perceptions and emotions of using geographical diversification as an
investment strategy.
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Results
The purpose of this study was achieved through examination of four research
questions:
Q1. How do U.S. investors describe their emotions about using geographical
diversification as an investment strategy?
Q2. How do U.S. investors describe their perceptions of geographical
diversification as a strategy for increasing investment returns?
Q3. How do U.S. investors describe their perceptions of geographical
diversification as a strategy for reducing investment risks?
Q4. How do U.S. investors explain their use of geographical diversification
strategy, in the context of literature, which does not support the strategy?
Research Question 1: How do U.S. investors describe their emotions about
using geographical diversification as an investment strategy? Based on the
participants’ responses to interviews and journal entries, two themes emerged: (a)
participants feel positive about geographical diversification and (b) participant think
positive emotions lead to positive investment decisions/behavior (Table 1).
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Table 1
Theme Surmised from Processing and Analysis of the Data for Research Question 1
Themes
Participants felt positive about
Number of participants
Percent of participants
who affirmed
who affirmed
9
90%
8
80%
geographical diversification strategy
Participants think positive emotions
lead to positive investment
decisions/behavior
Participants described emotions when deciding to use the geographical
diversification strategy. According to participants, they had positive emotional feelings
during decision making about the geographical diversification strategy. Nine of the 10
participants described their feelings when deciding to use geographical diversification as
a strategy as good, passionate, happy, excited, forward looking, optimistic, and positive.
Participant A reported, “My feelings are actually good when I’m making decisions to
diverse my portfolios geographically.” Similarly, Participant C stated, “I always feel
positive and excited when I’m making decisions to diversify across different countries.”
Participants H, I, and J reported feeling happy when they were making investment
decisions. Participant J stated, “I feel happy when I’m making investment decisions.”
Participants’ responses showed that they felt optimistic about the use of the
strategy, because they perceived that use of the geographical diversification strategy
would help to increase their investment returns and reduce their investment risks.
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Participants D, E, F, and G reported they feel optimistic about using the geographical
diversification strategy. Participant D reported, “I feel happy and optimistic anytime I
make decisions to invest my money across different countries.” Additionally, Participant
F stated, “I feel positive and optimistic about geographical diversification, because the
Asian financial markets are robust and recession free.”
Participants seemed to relate this optimism to pessimism about the U.S. financial
market, specifically related to the 2007-2008 financial crises. Participant E stated, “I have
negative feelings and negative outlook (perspective) about the domestic investment. My
feelings are positive toward geographical diversification investment.” As emphasized by
participants’ responses, participants felt positive about using the geographical
diversification strategy when making decisions to invest their money.
Participants thought having positive emotional feelings such as feeling happy or
excited, during investment decision-making, led to making positive investment decisions
such as increasing returns and decreasing risks. Similarly, participants described
perceiving that negative emotions would lead to negative investment decisions. Eight of
the 10 participants stated that their feelings influenced their decisions when diversifying
their financial assets geographically. For example, Participant A reported, “I know that
my feelings affect my investment decisions in a positive way.” He/she proceeded to state,
“I only make decisions when I’m happy and excited. I deferred investment decisions
when I’m angry, down or sad to avoid making risky decisions.” He/she continued to say,
“If I’m not passionate, excited or don’t feel good about a foreign investment, I don’t
invest in it.” Additionally, Participant F stated, “There were a number of days that I did
not make investment decisions because I was emotionally down. My investment is my
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money; therefore, I don’t want my sad feelings to negatively influence my investment
decisions.”
Similar to the other respondents, Participant D, E, G, H, I, and J stated their
feelings influence the investment decisions they make. The participants stated that they
did not want negative and angry feelings to influence their investment decisions.
Participants noted that negative feelings may result in non-beneficial investment
decisions. Participant D reported, “Well, investment comes with benefits and risks. I
don’t think about risks but I concentrate on the benefits because I’m optimistic when
making decision.” Participant J went on to state, “I refuse to make decisions when I’m
emotionally sad or angry because negative feelings can result in poor decisions.”
Two of 10 participants stated their emotional feelings did not influence their
investment decisions. Participant C stated, “I always feel positive and excited when I’m
making decisions to diversify across different countries but those feelings do not
influence my decisions. I don’t think my feelings influence my decisions.” The only thing
that influences my decision is “my yearly returns, and they keep going up.” And only one
of the 10 participants (Participant B) described his/her feelings during investment
decision as “usual.” The usual feelings mean Participant B felt neutral, thus, he/she had
no feelings of happiness, sadness, excitement, or depression when he/she was making
investment decision. Participant B reported:
I make decision to diversify my investment across different countries when I’m not
happy or sad, excited or depressed. I always look forward to investing when conditions
are right for decision making. I don’t want my investment decisions to be unduly
influenced by my emotional feelings. My investment decisions are free from emotions.
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In summary, participant responses indicated that they felt positive emotional
feelings about using geographical diversification as a strategy to invest. Additionally, the
majority of participants thought having positive emotional feelings during investment
decision-making would lead to positive investment behavior, thus, they made investment
decisions when they experienced positive emotions and avoided decisions when they felt
negative emotions.
Research Question 2: How do U.S. investors describe their perceptions of
geographical diversification as a strategy for increasing investment returns? Two
themes emerged from participants’ responses to research question two. The first theme
showed that participants perceived geographical diversification as an effective investment
strategy in increasing investment returns. The second theme indicated participants
thought having positive perceptions of emerging and growing foreign markets influenced
their perceptions of using geographical diversification as an effective strategy in
increasing investment returns (Table 2).
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Table 1
Theme Surmised from Processing and Analysis of the Data for Research Question 2
Themes
Participants perceived geographical
Number of participants
Percent of participants
who affirmed
who affirmed
10
100%
10
100%
diversification as effective investment
strategy in increasing investment
returns
Participants’ positive perceptions of
emerging and growing foreign
markets influence their perception of
diversification as a good strategy for
increasing returns
The first theme affirmed by all participants was that they perceived geographical
diversification as an effective strategy to increase investment returns. While participants
diversified their investments on different financial markets, participants unanimously
agreed with the perception that diversifying their financial assets across different
countries helps to increase investment returns. For instance, Participant A reported,
“Putting all your eggs in one basket is not a good investment strategy. My perception is
that investing my money in different countries helps to increase my investment profits.”
Likewise, Participant B stated, “I think holding investment across different countries in
different portfolios help increase investment returns. So my thought is that the
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geographical diversification is a prudent investment strategy.” Correspondingly,
Participant C explained:
The geographical diversification helps to maximize investment at a faster rate. I
feel that wherever your money is, that’s where your heart is (the investment
strategy that you are familiar with that it works, that is where you invest your
money). My geographical investment returns in land and housing keep going up
(increasing). So I know definitely that my investment returns going to increase
more.
Participant D stated:
My thought is that the geographical diversification is going to help me. I think I
can get more returns from my geographical diversification investments. The idea
that I’m going to make more profit when I invest across different countries
appeals to me.
As emphasized by participants, diversifying financial assets across different
countries was perceived as an effective strategy to increase investment returns. As
Participant A reflected, “Putting all your eggs in one basket is not a good investment
strategy.” Participants reported they felt optimistic about using the geographical
diversification strategy to increase their investment returns. Participants cited the 20072008 financial crises as the causes of their pessimism about the U.S. financial market and
cited these crises as a reason to spread their investments across different countries.
Specifically, participants described that the emerging or growing financial
markets are ideal markets for geographical diversification to increase investment returns.
According to participants, spreading their investment portfolios across developed and
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emerging/developing markets is a prudent investment strategy. Participants’ positive
perceptions of emerging and growing foreign markets influenced their perception of
diversification as a good strategy for increasing returns. Participants unanimously
concurred that their perceptions of emerging and rapidly growing markets in Europe,
Asia, Africa, and South America shaped their opinions and influenced their investment
decisions to use geographical diversification. For example, Participant B reported,
“Because of the introduction of the EU markets, the Eastern European countries’
economies are expanding in size and growing in strength. As an investor, diversifying in
growing financial markets is appealing to me.” Participant A stated, “The real estate
market in some parts of Africa, Asia, and South America are booming. The booming and
growing real estate markets are appealing and influence my investment decisions.”
Factors relating to time and stability were noted as benefits of emerging and
growing foreign markets. Participants likened fast growing markets not only to increasing
investment returns, but also to accruing profits at a faster rate. In explaining how his/her
perception of emerging and growing foreign markets influence his/her perception of the
strategy, Participant C said “Investing your financial assets in the financial markets of the
emerging and developing countries is a no brainer for increasing investment returns.”
This participant expanded, saying:
If I invest outside the U.S., the rate at which it increases is great. The rate at which
investment returns from geographical diversification increases appeals to me. My
investment returns keep growing year after year, so apparently, the strategy helps to
increase my profits. It takes too long to get profits in U.S. investment.
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Time was also factor for participants who needed short-term investments. Participants J
reported:
I have only 5 years to retire. The security of my retirement influenced my
decision to invest across different countries. The Asian financial market is strong
and does not see many fluctuations. This stability appeals to me and influences
my investment decisions.
Stability was an appealing feature of these markets.
Participant J stated, “The Middle-Eastern financial market is strong and does not see
many fluctuations.” Participant E shared:
My feeling of strong economic stability and the potential for increasing returns of
fast growing and expanding Asian, African, and South American financial
markets influenced my decision to geographically diversify my financial assets.
The emerging and growing nature of these markets appeals to me and shapes my
decision to diversify geographically.
In summary of participants’ responses from research question 2, the results
showed that participants perceived geographical diversification strategy increased their
investment returns. Specifically, participants’ positive perceptions of emerging and
growing foreign markets, due to stability and rapid returns, influenced their preference
for the geographical diversification strategy.
Research Question 3: How do U.S. investors describe their perceptions of
geographical diversification as a strategy for reducing investment risks? Two themes
emerged from participants’ responses to interviews and journal entries: (a) participants
perceived geographical diversification as an effective investment strategy in reducing
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investment risks and (b) participants’ positive perceptions of emerging and growing
foreign markets influence their perception of diversification as a good strategy for
reducing risks (Table 3).
Table 3
Theme Surmised from Processing and Analysis of the data for Research Question 3
Themes
Participants perceived geographical
Number of participants
Percent of participants
who affirmed
who affirmed
10
100%
10
100%
diversification as effective investment
strategy in reducing investment risks
Participants’ positive perceptions of
emerging and growing foreign
markets influence their perception of
diversification as a good strategy for
reducing risks
All participants perceived geographical diversification as an effective strategy to
reduce investment risks. Specifically, participants perceived the distribution of their
investments across different countries as an effective method for reducing investment
risks. Participants noted that some markets are strong and exposed to minimal risks
compared to other markets.
Participant A noted:
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If you put all your eggs in one basket and you drop that basket, you will lose all
your eggs. In the same way, if I invest all my money in one market and something
happens, I will lose all my investment. However, if I spread my investment across
different countries, I will significantly reduce my investment risks. In short, the
geographical diversification helps me reduce investment risks.
In explaining his/her perception about geographical diversification, as a strategy to
reduce investment risk, Participant B stated, “We saw what happened to the U.S. and
European financial markets in 2007-2008. Not every country has the same investment
risks. My investments in Asian and African markets were subjected to relatively lesser
investment risks.” Similarly, Participant C stated:
I think my investments have low risks. If I have investments invested in different
countries, I reduce my risks because some of the countries’ financial markets are
expanding. I think the geographical diversification strategy is helping to reduce
my investment risks. Diversifying my investment across different countries is a
good strategy to reduce my investment risks.
The rest of the participants’ responses about their perceptions of the geographical
diversification strategy in reducing investment risks are similar to the responses from
other participants in this study. Similarly, participants perceived geographical
diversification strategy as an upside risks because of their perceptions that the returns on
investments across different countries will exceed the expected returns on their
investments. Participants reported that investing all their financial portfolios in the U.S.
may expose their investments to high risks if the U.S. market faces financial problems.
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To reduce such investments risks, participants argued, they perceived the diversification
strategy as effective in achieving their goal of reducing investment risks.
The second theme of research question 3 shows that the participants’ positive
perceptions of emerging and growing foreign markets influence their perception of
diversification as a good strategy for reducing risks. The results show that participants
responses of positive perceptions of the African, Asian, South America emerging and
growing markets influenced their perception of reducing investment risks by diversifying
their across those markets. Participant D stated:
Geographical diversification strategy helps to reduce investment risks because
reduced risks translate into increased investment returns. The growing markets in
Africa, Asia, and South America are perfect markets to distribute investment risks
and virtually reduce investment risks. Such markets shape and influence my
decision about geographical diversification to reduce investment risks.
Additionally, Participant I explained:
The strategy of distributing investments across different markets to reduce risks
appeals to me and shapes investment decisions. The geographical diversification
strategy helps reduce investment risks because investment risks are different
across different countries. Investments in real estate in Asia and Africa are
growing and less risky. These less risky markets appeal to me and shape my
geographical diversification decisions.
Specifically, participants reported their positive perceptions of some industries in
foreign markets, as influencing their investment decisions to use geographical
diversification to reduce risks. According to participants, spreading investments on the
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Asian, European, South American, and African markets helps reduce investment risks.
Specifically, participants noted their perceptions of diversifying on the emerging and
growing real estate in African, Asian, and South American markets to reduce risks as
influencing their perceptions of the strategy. Participant F reported:
The strategy of casting your net wide, as in geographical diversification strategy,
appeal to me and shape my investment decision to reduce risk. The real estate
investments in Asia and Africa have are emerging and growing. These markets
have nearly zero risk.
Similarly, Participant G noted:
I have been investing in Asian and African real estate for the past 15 years. My
investments have not been exposed to many risks. This strategy of spreading
investment across different countries to reduce risks is what shapes my opinion
and appeal to me and influenced my investment decisions.
Participant J reported, “Diversifying in these oil producing and emerging markets helps
to reduce investment risks due to the market stability.”
In summary of participants’ responses from research question 3, participant
responses showed that participants perceived the geographical diversification strategy as
effective in reducing investment risks. Specifically, participants’ positive perceptions of
the emerging and growing foreign markets were based on the rapid returns on market
investments. Participants perceived the real estate and oil markets as providing
investment stability, hence the participants’ preference of using the geographical
diversification strategy to reduce investment risks.
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Research Question 4: How do U.S. investors explain their use of geographical
diversification strategy, in the context of literature, which does not support the
strategy? Two themes emerged from participants’ responses to interviews and journal
entries: (a) participants believe the strategy is working for them and (b) participants value
their own experience over the financial literature (Table 4).
Table 4
Theme Surmised from Processing and Analysis of the Data for Research Question 4
Themes
Participants believe the
Number of participants who
Percent of participants who
affirmed
affirmed
10
100%
10
100%
strategy is working for them
Participants value their own
experience over the
financial literature
Only three of 10 participants reported being familiar with the financial literature,
which says geographical diversification was not effective in increasing returns and
reducing risks (Bobullo, Iturriaga, & Gaite, 2008; Cai, Xu, & Zeng, 2016; Chu-Sheng,
2010; Gocmen, 2010; Maldonado & Saunders 1981; Raju & Khanapuri, 2010; Singh,
Kumar, & Pandey, 2010). Regardless of participants’ knowledge of this specific
literature, all participants described negative feelings and thoughts about the financial
literature based on their own positive perceptions and experiences related to the use of
geographical diversification. Participants believed the geographical diversification
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strategy is working for them, specifically in terms of increasing returns and reducing
returns. For example, Participant A reported:
I’m not familiar with the financial literature but I can say I totally disagree. Even
though I’m a beginner investor with only 5 years investment experience, I’ve seen
profit. I have negative feelings about the literature because I think the
geographical diversification strategy is an effective investment strategy. My
thoughts are that spreading my investments across different countries does not
only help increase my returns but also help reduce investment risks.
Similarly, Participant B stated,
I’m not aware of any literature that says geographical diversification is not
effective. There are a number of good resources for investment, when you go
international, you’re extending the market. My feelings about the literature are
negative, because I know the strategy is effective. I can also direct you to some of
the resources that indicate the strategy is effective in increasing returns and
reducing investment risks.
Additionally, Participant E noted:
I don’t know about the literature. My investment in shipping companies and real
estate developments in Europe and Africa are doing very well. I want to get
copies of the literature you’re alluding to. I will like to know the basis of that
literature.
Participants seemed to support the contradiction of the financial literature based
on specific factors, such as which countries and what industries investors use to diversify
their financial portfolios. Participant F noted, “Yes, I know of different financial
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literature that says geographical diversification is not an effective strategy. I have
negative feelings about that literature. My returns on diversified investments in real estate
on African and Asian markets are doing well.” Participant J stated:
Yes, I’m familiar with the financial literature that says geographical
diversification strategy is not effective. I have negative feelings about the
financial literature. I think it depends on the industry that is invested in. The real
estate markets in the emerging markets are perfect markets to diversify your
investments. I’m aware of what happened on the U.S. financial market in 2007 to
2008.
Despite the financial literature, the results showed that participants believed that
the geographical diversification strategy is working for them to increase returns and
reduce risks. As a result of those beliefs, as well as that experience, participant reported
having negative feelings about the financial literature that says geographical
diversification strategy is not effective. Specifically, the data also suggested that
participants valued their own experience over the financial literature. Even though seven
participants were not familiar with the financial literature, which says geographical
diversification strategy is not effective, they were dismissive of the literature and did not
plan to change their use of the strategy. For example, Participant A reported, “Yes, I will
continue to use geographical diversification strategy because my investment returns keep
growing and increasing.” He/she went on to say, “I see that Dow Jones fluctuating. I will
definitely continue to diversify geographically.” Similarly, Participant B stated:
Yes, my diversified investments in Europe, Africa and South America are
performing better than those in the U.S. markets. There are a good number of
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international investments out there with great investment potential. I will question
the notion that international investments are not effective.
In the same way, Participant E reported:
Yes, I will continue to invest across different countries. I do not understand why I
should change my strategy if the current one is working well. You don’t change
or modify your strategy on the battlefield if your troops are winning. That is
exactly how I see my investment abroad, winning.
Participant H noted, “I have been investing in government bonds in Eastern Europe for
over 10 years. My investment returns keep growing. I will not change my investment
decision when everything is going well.” Participant J reported, “Yes, I will continue
diversifying my investment across different countries, my investments are held in
construction and real estate. My investment returns increase every year. I’m not going to
change my position.”
In summary of participants’ responses from research question 4, results showed
that participants believed geographical diversification strategy is working for them by
increasing their investment returns and reducing their investment risks. As a result of
those beliefs, they had negative feelings about the financial literature, which contradicted
their own experiences. The results showed that participants valued their experiences over
the financial literature and did not plan to change their use of the strategy.
Evaluation of Findings
In order to understand the results from this case study, it is imperative to evaluate
the findings from the perspectives of the existing literature. The purpose of this
qualitative case study was to explore U.S. financial investors’ perceptions and emotions
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regarding their continued use of geographical diversification as an investment strategy to
increase investment returns and decrease investment risks, specifically when empirical
evidence does not support the use of the strategy.
Research Question 1: How do U.S. investors describe their emotions about
using geographical diversification as an investment strategy? Research question one
allowed the researcher to understand the investors’ emotional states during investment
decisions and the influence of those emotions on their investment decision-making. The
results from research question one highlighted a number of commonalities that were
reduced to two themes. Specifically, participants had positive emotional feelings about
using geographical diversification as a strategy. Moreover, the majority of participants
thought having positive emotional feelings during investment decision-making would
lead to positive investment behavior.
The findings of this study are consistent with the outcomes of previous studies
from Gambetti and Giusberti (2012), Myeong-Gu and Barrett (2007), and Sullivan
(2011), who noted that investors had happy and excited emotions at the time of making
investment decisions made more investment decisions. Similarly, the findings by Sahi,
Bacha, and Masih (2013) demonstrated that when participants felt positive emotional
feelings about investments, they invested more in those investments. Lee and Andrade
(2015) found that when people were excited about the increase in value of their
investment portfolios, they made more decisions.
The findings of this study showed that the majority of participants thought
positive emotional feelings during investment decision-making would lead to positive
investment behavior. On the contrary, participants avoided making investment decisions
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when they felt negatively because they believed negative emotions would lead to
negative investment decisions. The findings of this study are consistent with findings
from Blay, Kadous, and Sawers (2012), Gambetti and Giusberti (2012), Haocheng, Jian,
Limin, and Shuyi (2014), Lee and Andrade (2015), Myeong-Gu and Barrett (2007),
Patterson and Daigler (2014), Reyes (2006), and Sahi et al. (2013), which explain that
investors’ emotional feelings, negative or positive, influenced investors’ investment
decisions. Specifically, the results of this study are consistent with Myeong-Gu and
Barrett’s (2007) findings that investors who demonstrated positive feelings during
investment decision-making performed better than investors who demonstrated negative
emotional feelings. Gambetti and Giusberti (2012) also found that the type of emotions
matters in the decision-making; these authors found that investors who were angry at the
time of investment decision-making made higher risk decisions than those were anxious.
Contrary to this finding, other research has suggested negative emotions lead to more
rational investing behavior (Chu, Im, & Jang, 2012; Van de Laar & de Neubourg, 2006).
Additionally, the findings of this study are supported by Sahi et al.’s (2013) findings that
when participants’ emotional feelings about the investments were positive and stronger
they made more and beneficial investment decisions. Consistent with the findings of this
study, when the investors’ emotional feelings about portfolio performance were negative,
they demonstrated reluctance in investing is such markets (Sahi et al., 2013).
Research Question 2: How do U.S. investors describe their perceptions of
geographical diversification as a strategy for increasing investment returns? The
significance of research question two is that it allowed the researcher to understand the
investors’ perception of geographical diversification as a strategy for increasing
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investment returns. The results from research question two highlighted a number of
commonalities that were reduced to two themes. Specifically, participants perceived
geographical diversification as effective investment strategy for increasing investment
returns. Additionally, participants’ positive perceptions of emerging and growing foreign
markets influenced their perception of diversification as a good strategy for increasing
investment returns.
The findings in this study demonstrated that participants perceived geographical
diversification as effective investment strategy for increasing investment returns. The
findings in this study are consistent with findings of Hargis and Mei (2006), Markowitz
(1959), Masron and Fereidouni (2010), Odier and Solnik (1993), Solnik (1974),
Srivastava (2007), Torres García-Heras (2011) findings that the strategy helped to
increase investment returns. Other research by Bobullo, Iturriaga, and Gaite (2008), Cai,
Xu, and Zeng (2016), Chu-Sheng (2010), Gocmen (2010), Maldonado and Saunders
(1981), Raju and Khanapuri (2010), and Singh, Kumar, and Pandey (2010) found that the
interdependence of the global investments have diminished the benefits of using the
geographical diversification as a strategy to increase investment returns and reduce
investment risks. The results of this study are in alignment with studies conducted by
Harras and Somette (2011) and Rose, Norman, and Rose (2010). Consistent with the
findings of this study, Harras and Somette (2011) and Rose et al. (2010) found that
whenever investors have perceptions of positive perceptions about investment outcomes,
investors invested more of their financial portfolios in that investment. On the contrary,
when the investors perceived negative feedback about investments, investors did not
invest their financial assets in those investments (Harras & Somette, 2011; Rose et al.,
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2010). The responses from participants in this study showed that participants’ confidence
in the geographical diversification strategy influenced their decisions to use the strategy
to increase investment returns. Consistent with the findings of this study, investors who
demonstrated confidence in the markets made increasingly beneficial investment
decisions (Jing, Chen, & Zhang, 2013; Yu & Xiaosong, 2015). Additionally, Hoffmann,
Post, and Pennings (2015) found that investors who perceived investment returns as
having higher and upward expectations invested more of their portfolios in such
investments. Similar to the findings in this study, investors’ perceptions of positive
returns on investments significantly influenced their investment choices (Hari &
Ayappan, 2014).
The findings of this study showed participants’ positive perceptions of the
emerging and growing foreign markets were due to stability, rapid returns, and specific
industries such as real estate or oil. Several studies have shown positive investment
returns from these emerging markets (Haran el al., 2016; Hari & Ayappan, 2014; Jing,
Chen, & Zhang, 2013; Masron & Fereidouni, 2010; Yu & Xiaosong, 2015). The results
of this study are consistent with Srivastava (2007) findings that increases in investment
returns of geographically diversified investments depended on the emerging Asian
markets. Correspondingly, Saiti et al. (2014) found that investors diversified in the
growing foreign markets of Japan, GCC ex-Saudi, Indonesia, Malaysia and Taiwan due
to increased investment returns. Similarly, Meriç, Jie, and Meriç (2016) found that US,
Canadian, German, U.K., and French investors, who diversified their financial portfolios
in the Indonesian, Philippine, Malaysian, Thai, Jordanian, Moroccan, Egyptian, and
Pakistani emerging stock markets, experienced beneficial investment returns. Additional,
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prior literature has connected investment returns to specific industries, as noted by the
participants. The results of this study are supported by Masron and Fereidouni’s (2010)
findings that the returns on housing investments exceeded the rate of inflation on the
emerging real estate market of Iran. In another study, Haran el al. (2016) found that
investors who diversified in the emerging real estate markets of the Czech Republic,
Hungary, and Poland had potential to enhance their investment performances.
Participants’ perceptions of diversifying in oil-producing countries to increase investment
returns are in line with a study conducted by Mimouni, Charfeddine, and Al-Azzam
(2016). Mimouni et al. (2016) found that an increase in investment returns related to
international diversification in foreign markets of Gulf Cooperation Council (GCC)
countries (e.g., Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain, and
Oman) further develop. In an unrelated study, Cheng and Roulac (2007) found that the
effectiveness of geographical diversification in real estate investment is limited to largesized investment.
Research Question 3: How do U.S. investors describe their perceptions of
geographical diversification as a strategy for reducing investment risks? The
importance of research question three is that it allowed the researcher understand the
investors’ perceptions of geographical diversification as a strategy for reducing
investment risks. The results from research question three highlighted a number of
commonalities that were reduced to two themes. Specifically, participants perceived
geographical diversification as an effective investment strategy in reducing investment
risks. Moreover, participants’ positive perceptions of emerging and growing foreign
markets influenced their perception of diversification as a good strategy for reducing
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risks. The findings of this study showed that participants perceived the geographical
diversification strategy as effective in reducing investment risks. The findings in this
study are consistent with Hargis and Mei (2006), Markowitz (1959), Masron and
Fereidouni (2010), Odier and Solnik (1993), Solnik (1974), Srivastava (2007), and Torres
García-Heras’ (2011) findings that the geographical diversification strategy is effective in
reducing investment risks. The findings in this study however, contradict Chu-Sheng
(2010), Gocmen (2010) Maldonado and Saunders (1981), Raju and Khanapuri (2010),
and Singh et al.’s (2010) findings, which explain that the geographical diversification
strategy is not effective in reducing risks due to the globalization of the markets. Cheng
and Roulac (2007) found that the effectiveness of geographical diversification in real
estate investment is limited to the size of the investment. Učkar and Carlin’s (2011) and
Wang, Keller, and Siegrist (2011) findings showed investors who made investment
decisions based on their perceptions, rather than empirical results, incurred heavy shortterm losses and risks.
The findings of this study are aligned with the findings from previous studies. The
findings are consistent with the findings by Roszkowski and Davey (2010), who found
that investors’ perceptions of risks influenced their decisions because when investors’
perceptions of risks were low, their risks tolerance level was high. The results of this
study indicated that participants perceived the strategy as helping to reduce investment
risks and thus continued the use of the strategy. Similar to the findings of this study, a
study conducted by Chassot, Hampl, and Wustenhagen (2014) found that when venture
capitalist investors perceived the regulatory exposure as low risk, they made more
investment decisions. On the contrary, when investors perceived regulatory exposure as
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high risk, investors made less investment decisions in those industries. Additionally, the
findings of this study are in line with findings by Paruchuri and Misangy (2015). The
findings from Paruchuri and Misangy showed that investors not only traded more when
they perceived the investments as low risk but also that they held their portfolios for a
long period of time.
The findings showed participants’ positive perceptions of emerging and growing
foreign markets and specific industries in foreign markets contributed to their positive
perception of the strategy to reduce risks. As expressed by participants of this study,
Srivastava (2007) found that geographical diversification strategies to reduce investment
risks relied primarily on the emerging Asian markets. Additionally, Masron and
Fereidouni (2010) found that diversification in the housing industry resulted in lowest
risk-to-reward ratio in the Iran market. Consistent with the findings of this study the
results from Masron and Fereidouni (2010), Srivastava (2007), and Torres García-Heras
(2011) found that diversified investments on the U.S. and the European countries’ credit
default swap markets, particularly, the Spanish market, performed worst in reducing
investment risks compared to the diversified investments on the South American
countries’ markets. The findings of this study are in also in alignment with Haran el al.’s
(2016) findings that diversifying in real estate markets on the emerging markets of Czech
Republic, Hungary, and Poland helped to reduce investment risks. Diversification on the
Austria, Germany, and Poland stock markets experienced low volatility compared to the
Russian and Turkey markets (Yavas & Dedi, 2016). Consistent with the results of this
study, Yavas and Dedi’s (2016) findings showed that those markets had less risk and
could be used to reduce investment risks. Additionally, Saiti et al. (2014) found that
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international diversification was effective in reducing unforeseen investment risks on the
emerging and growing foreign markets of Japan, GCC (e.g., Saudi, Indonesia, Malaysia,
and Taiwan). Other research Učkar and Carlin (2011) and Wang et al.’s (2011) found that
investors, who made investment decisions based on their perceptions, rather than
empirical results, incurred heavy short-term losses and risks.
Research Question 4: How do U.S. investors explain their use of geographical
diversification strategy, in the context of literature, which does not support the
strategy? The significance of research question four is that it allowed the researcher to
understand the investors’ thoughts on continuing use of geographical diversification as a
strategy when literature does not support the strategy. The results from research question
four highlighted a number of commonalities that were reduced to two themes.
Specifically, participants believed the strategy is working for them. Additionally,
participants valued their own experience over the financial literature. As a result of those
beliefs, they had negative feelings about the financial literature, which contradicted their
own experiences.
The results of this study are in line with the findings from previous studies. The
findings of this study showed that participants believed geographical diversification
strategies were working for them by increasing their investment returns and reducing
their investment risks. Results showed that participants did not plan to change their
investing behavior, even though the majority of participants were not familiar with the
financial literature suggesting that the geographical diversification strategy is not
effective. The findings of this study are consistent with previous studies on the
psychological bias characteristics of investors (Akerlof & Shiller, 2010; Duxbury, 2015;
117
Gupta & Banik 2013; Kahneman, 2011; Mitroi & Oproiu, 2014; Tekçe, Yılmaz, &
Bildik, 2016). The findings of this study showed that participants believed the strategy is
working for them and they valued their experience over financial literature. As a result of
those beliefs, they described negative feelings about the financial literature that
contradicted their own experiences. Chaarlas and Lawrence (2012) found that regardless
of the available financial information, investors’ decisions were influenced by their
anchoring bias. Similarly, a study conducted by Kapor (2014) found that financial
investors made investment decisions based on their own experience without using all
financial information available to them. In other research, Yu and Xiaosong (2015) found
that investors made decisions based on individual cognitive prejudices rather than
rational financial evidence. Tekçe, Yılmaz, and Bildik (2016) found that investors
demonstrated feelings of overconfidence. Investors’ reliance on their own experiences
and judgments was positively correlated with familiarity bias, which may affect sound
decision making (Tekçe, Yılmaz, & Bildik, 2016). In another study, Ateş, Coşkun, Şahin,
and Demircan (2016) found that the investment decisions of investors who relied on
informal sources of financial information were more likely to be influenced by behavioral
biases, rather than those investors who based their decisions on formal financial
information. Duxbury (2015) and Mitroi and Oproiu (2014) found that investors’
perceptions of familiarity with financial products influenced their investment decisions.
Gupta and Banik (2013), Lai, Chen, and Huang (2010), and Wang et al. (2011) found that
investors traded more due to anchoring bias. Research conducted by Hon-Snir,
Kudryavtsev, and Cohen (2012) showed that while the most experienced investors’
decisions were less likely influenced by their psychological biases, compared to the least
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experienced investors, generally, all investors’ investment decisions were influenced by
psychological biases. Gupta and Banik’s (2013) findings indicated that 95% of investors
demonstrated anchoring bias during investment decisions.
Summary
A qualitative case study that utilized interview questions and journal entries to
collect data from participants was conducted to explore U.S. financial investors’
perceptions and emotions regarding their continued use of geographical diversification as
an investment strategy. Themes that emerged from research question 1 were that (a)
participants felt positive about using geographical diversification and (b) participants
think positive emotions lead to positive investment decisions/behavior. Themes that
emerged from research question 2 were that (a) participants perceived geographical
diversification as an effective investment strategy for increasing investment returns and
(b) participants’ positive perceptions of emerging and growing foreign markets
influenced their perception of diversification as a good strategy for increasing returns.
Themes that emerged from research questions 3 were that (a) participants perceived
geographical diversification as an effective investment strategy for reducing investment
risks and (b) participants’ positive perceptions of emerging and growing foreign markets
influenced their perception of diversification as a good strategy for reducing risks. Lastly,
themes that emerged from research question 4 were that (a) participants believe the
strategy is working for them and (b) participants value their own experience over the
financial literature.
The evaluation of this study’s findings can be concluded as follows: (a) the
findings in this study showed that the majority (90%) of participants felt positive
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emotions when making decisions. The findings are consistent with Blay et al. (2012),
Gambetti and Giusberti (2012), Haocheng et al.(2014), Lee and Andrade (2015),
Myeong-Gu and Barrett (2007), Patterson and Daigler (2014), Reyes (2006), Sahi et al.’s
(2013), and Sullivan (2011) findings that that investors’ emotional feelings, negative or
positive, influenced their investment decisions and (b) the results of this study showed
that the majority of participants thought having positive emotional feelings during
investment decision-making would lead to positive investment behavior. The findings of
this study regarding the benefits that positive emotional feelings that participants have
during investment decision-making are consistent with the findings by Gambetti and
Giusberti (2012), Myeong-Gu and Barrett (2007), and Sullivan (2007). Contrary to this
finding, other research has suggested negative emotions lead to more rational investing
behavior (Chu et al., 2012; Van de Laar & de Neubourg, 2006). The findings showed that
participants in this study believed that the geographical diversification strategy was
effective in increasing investment returns and reducing investment risks. Consistent with
the findings in this study, Haran el al. (2016), Hargis and Mei (2006), Markowitz (1959),
Masron and Fereidouni (2010), Odier and Solnik (1993), Saiti et al. (2014), Solnik
(1974), Srivastava (2007), Torres García-Heras (2011), and Yavas and Dedi’s (2016)
findings indicated that the strategy is effective in increasing returns and reducing risks.
Contrary to the findings in this study, Bobillo et al. (2008), Cai et al. (2016), Chu-Sheng
(2010), Gocmen (2010), Maldonado and Saunders (1981), Raju and Khanapuri (2010),
and Singh et al. (2010) found that the effects of globalization had diminished the general
benefits of geographical diversification in increasing returns and reducing risks, (d) the
findings showed that participants’ positive perceptions of emerging and growing foreign
120
markets due to stability and rapid returns of real estate and oil markets influenced their
preference for the geographical diversification strategy. The results in this study are
consistent with Meriç et al. (2016), Saiti et al. (2014), and Srivastava (2007) findings that
diversification on the emerging and growing markets resulted in increased investment
returns and reduced risks. Contrary to the findings of this study, Raju and Khanapuri
(2010) and Singh et al. (2010) found that the interdependence of international markets
has made the emerging Asian markets non-beneficial for geographical diversification.
Similarly, Cai et al. (2016) cautioned that investors should carefully consider the high
cost of operating geographical diversification investments before making decisions.
Participants’ perceptions and emotions, as well as their own experience of the
geographical diversification strategy, influenced their investment decisions in increasing
returns and reducing risks. Consistent with the findings of this study, Gupta and Banik
(2013), Lai et al. (2010), and Wang et al. (2011) found that investors traded more due to
anchoring bias. The findings of this study are consistent with literature on behavioral
finance theory because the investors’ perceptions and emotions of the geographical
diversification strategy influenced their investment decisions to use the strategy (Akerlof
& Shiller, 2010; Duxbury, 2015; Gupta & Banik, 2013; Kahneman, 2011). The findings
are consistent with Akerlof and Shiller (2010), Duxbury (2015), Gupta and Banik (2013),
Kahneman (2011), Mitroi and Oproiu (2014), and Tekçe, Yılmaz, and Bildik’s (2016)
findings that financial investors have the tendency to make investment decisions based on
emotions, perceptions, and biases.
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Chapter 5: Implications, Recommendations, and Conclusions
The 2008 financial crisis showed that investors’ continued use of the modern
portfolio theory (MPT) strategy of geographical diversification, as an investment
strategy, may not be effective in increasing returns and reducing risk (Smith & Harvey,
2011). The 2008 financial crisis that resulted in increased cost, decreased returns, and
increased risks (Bobillo, Iturriaga, & Gaite, 2008; Chu-Sheng, 2010; Gocmen, 2010) calls
for an expanded understanding of investors’ behaviors. The purpose of this qualitative
case study was to explore U.S. financial investors’ perceptions and emotions regarding
their continued use of geographical diversification as an investment strategy.
In order to achieve the purpose of the study, a case study design was used to
collect data from participants through interviews in person or by phone and journaling to
answer the research questions. This qualitative case study design allowed the researcher
to collect and analyze data from each participant in order to better understand the investor
perceptions and emotions of using geographical diversification as an investment strategy.
The data were reflected upon and deduced into themes for analysis. One of the
delimitations of the study was the location of Washington D.C. metropolitan area.
Regarding the location, the study recruited U.S. investors who live or work in
Washington DC Metropolitan Area. Due to the limitation of the location, the findings of
this study may not be applicable to investors in other countries.
Chapter 5 consists of implications, recommendations, and conclusions. The
implication section provides a discussion of the present study. Additionally,
recommendations will be made for practical application of the findings while providing
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recommendations for future research. Finally, a summary of this chapter will be provided
in the conclusions section.
Implications
From the results obtained from participants on their perceptions and emotions
about using geographical diversification as an investment strategy, implications for
financial investors, practitioners, and researchers were drawn. The findings of this study
may contribute to research literature in the general areas of information on MPT,
diversification strategy, and emotions and perceptions in investors. The conclusions made
from this study have practical and theoretical implications because the findings may help
investors and financial practitioners make beneficial investment decisions. Additionally,
researchers and students may use the findings of this study to enhance their knowledge of
the investors’ perceptions and emotions related to continued use of an ineffective
strategy.
Research Question 1: How do U.S. investors describe their emotions about
using geographical diversification as an investment strategy? Two outliners that could
not be supported by literature were observed. In the first outliner, one of ten participants
stated “his/her decisions were emotion-free.” In regards the second outliner, two of 10
participants reported their “decisions were not influenced by emotions.” The two outliers
are not supported by literature. The findings from Blay, Kadous, and Sawers (2012),
Gambetti and Giusberti (2012), Haocheng, Jian, Limin, and Shuyi (2014), Lee and
Andrade (2015), Myeong-Gu and Barrett (2007), Patterson and Daigler (2014), Reyes
(2006), and Sahi et al. (2013) indicate that investors’ emotional feelings, negative or
positive, influenced investment decisions. Specifically, the results of this study are
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consistent with Myeong-Gu and Barrett’s (2007) findings that investors who
demonstrated positive feelings, during investment decision-making, performed better
than investors who demonstrated negative emotional feelings. Gambetti and Giusberti
(2012) also found that the type of emotions matters in the decision-making; these authors
found that investors who were angry at the time of investment decision-making made
higher risk decisions than those who were anxious. Similarly, Lee and Andrade (2015)
found that when people were excited about the increase in value of their investment
portfolios they made more decisions that were effective in increasing investment returns
and reducing investment risks.
Participants had positive emotions when deciding to use the strategy and they felt
positive about geographical diversification strategy. Participants described their emotions
as good, passionate, happy, excited, forward looking, optimistic, and positive, which
influenced them when making decisions to use geographical diversification. Numerous
studies suggest that emotions play a role in investor behavior (Chu et al., 2012; MyeongGu & Barrett, 2007; Shiv et al., 2005; Van de Laar & de Neubourg, 2006). The results of
this study are consistent with studies by Baker, Coval, and Stein (2007), Duxbury (2015),
Hyoyoun and Wook (2013), Muradoglu and Harvey (2012), and Peteros and Maleyeff’s
(2013) findings that investors demonstrated emotions when making investment decisions.
Moreover, participants of this study thought positive emotions lead to positive investment
decisions/behavior. For example, as Participant A reported, “I know that my feelings
affect my investment decisions in a positive way.” He/she proceeded to state, “I only
make decisions when I’m happy and excited. I deferred investment decisions when I’m
angry, down or sad to avoid making risky decisions.” He/she continued to say, “If I’m not
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passionate, excited or don’t feel good about foreign investments, I don’t invest in it.” In
line with the conclusions of this study, investors who had happy and excited emotions at
the time of making investment decisions made rational investment decisions, which
resulted in increased returns and decreased investment risks (Gambetti, Giusberti, 2012;
Myeong-Gu & Barrett, 2007; Sullivan, 2011). The findings of this study showed that
positive emotional feelings led to investors making positive investment decisions.
Consistent with behavioral finance theory, participants in this study made investment
decisions about using geographical diversification when they felt positive emotions and
avoided decisions when they felt negative emotions (Duxbury, 2015; Muradoglu &
Harvey, 2012; Peteros & Maleyeff, 2013). The findings of this study have practical
implications for investors to make profitable investment decisions to increase returns and
reduce risks. For example, when participants’ emotional feelings about the investments
were stronger, they made increased and beneficial investment decisions (Duxbury, 2015;
Muradoglu & Harvey, 2012; Peteros & Maleyeff, 2013). On the contrary, when the
investors’ emotional feelings about the portfolios’ performances were weak, they showed
disinterest in making investment decisions (Duxbury, 2015; Muradoglu & Harvey, 2012;
Peteros & Maleyeff, 2013). Investors and financial planners should recognize and
acknowledge that those emotional feelings could influence them to make beneficial or
non-beneficial investment decisions. O'Creevy et al. (2011) found that the investments of
investors who critically analyzed their emotions and regulated those emotions during
investment decisions performed better than the investments of investors who made
investment decisions without analyzing and regulating their emotions. Analyzing and
regulating emotional feelings may help investors make profitable decisions leading to
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increased investment returns and reducing investment risks (Duxbury, 2015; Muradoglu
& Harvey, 2012; Peteros & Maleyeff, 2013). Understanding of investor’s behaviors may
help financial planners provide advice to investors, which may result in increasing returns
and decreasing risks (Duxbury, 2015; Jing et al., 2013; Yu & Xiaosong, 2015). The
findings from this study regarding investors’ perceptions and emotions of using the
diversification strategy may be used to develop teaching tools for investors, focusing on
those thoughts and feelings about making prudent investment decisions (Duxbury, 2015;
Jing et al., 2013; Yu & Xiaosong, 2015).
Participants’ investments behaviors, where their emotional feelings influenced
their investment decisions, are consistent with behavioral finance theory (Chu et al.,
2012; Duxbury, 2015; Hyoyoun & Wook, 2013; Muradoglu & Harvey, 2012; Peteros &
Maleyeff, 2013; Van de Laar & de Neubourg, 2006). The participants’ investment
behaviors cannot be explained by the conventional finance theory, which assumes that all
investors make rational investment decisions (Chu et al., 2012; Duxbury, 2015; Hyoyoun
& Wook, 2013; Muradoglu & Harvey, 2012; Peteros & Maleyeff, 2013; Van de Laar &
de Neubourg, 2006). Positive versus negative emotions appear to have different impacts
on investor behavior (Duxbury, 2015; Hyoyoun & Wook, 2013; Myeong-Gu & Barrett,
2007). Emotional feelings, negative or positive, when making investment decisions
influenced the investment decision (Myeong-Gu & Barrett, 2007). The implication is that
participants’ positive emotional feelings influenced their investment decisions to increase
returns and reduce risks. This finding means that participants who demonstrate emotional
feelings, when making decision, is a normal process as supported in previous studies’
findings (Duxbury, 2015; Muradoglu & Harvey, 2012; Peteros & Maleyeff, 2013).
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However, other research has suggested negative emotions lead to more rational investing
behavior (Chu et al., 2012; Van de Laar & de Neubourg, 2006). The authors’ findings
contradict the results in this study. Financial researchers should acknowledge that
consistent with behavioral finance theory, investors demonstrate emotional feelings
during investment decisions (Peteros & Maleyeff, 2013). Moreover, financial planners
and financial researchers should recognize that investors’ perceptions of the strategy
influenced their investment decisions, which could lead to making profitable or risky
investment decisions (Duxbury, 2015; Jing et al., 2013; Yu & Xiaosong, 2015). Financial
researchers should know that different emotional feelings positive or negative, influence
investors differently to make beneficial or less than optimal investment decisions
(Duxbury, 2015; Hyoyoun & Wook, 2013). Acknowledging and understanding that
investors’ investment behaviors are consistent with behavioral finance theory may help
researchers to better understand the investors’ investment behaviors, thus incorporating
investors’ investment behaviors in the analysis of investment outcomes to be able to
develop effective investment tools, which may help investors make profitable investment
decisions. This study contributes to knowledge and literature by extending application of
behavioral finance theory to the MPT, geographical diversification strategy.
Research Question 2: How do U.S. investors describe their perceptions of
geographical diversification as a strategy for increasing investment returns? The
findings of this study showed that participants perceived geographical diversification as
an effective strategy, which increased their investment returns, which are consistent with
findings of Haran et al. (2016), Hargis and Mei (2006), Markowitz (1959), Masron and
Fereidouni (2010), Meriç, Jie, and Meriç (2016), Odier and Solnik (1993), Saiti, Bacha,
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and Masih (2014), Solnik (1974), Srivastava (2007), and Torres García-Heras (2011) that
the geographical diversification strategy helped to increase investment returns.
Participants’ responses to their perceptions of continued use of the geographical
diversification strategy to increase investment returns demonstrated the application of the
behavioral finance theory to the geographical diversification strategy (Fenzel &
Pelzmann, 2012; Hyoyoun & Wook, 2013; Jing et al., 2013; Peteros & Maleyeff, 2013;
Shiller, 2003; Kahneman & Tversky, 1979; Yu & Xiaosong, 2015). Specifically,
participants’ positive perceptions of the emerging and growing foreign markets were
based on the rapid returns on investments in those markets. Participants perceived the real
estate and oil markets as providing investment stability, hence the participants’
preference for using the geographical diversification strategy to increase investment
returns. A study conducted by Srivastava (2007) indicated that investors, who diversified
their investments on the emerging markets, increased their investment returns.
Specifically, Saiti, Bacha, and Masih (2014) examined whether the Islamic stock indices
provided a special avenue for the US-based investors’ investments in Islamic countries.
Saiti et al. (2014) found that the investment in Islamic countries provided better
diversification benefits of increasing returns compared to the far East countries (e.g.,
China, Hong Kong, Indonesia, Japan, Malaysia, North Korea, South Korea, and Taiwan).
Additionally, results from Meric et al. (2016) showed that the investors from the U.S.,
Canada, Germany, the U.K., and France had the greatest portfolio diversification benefits
on investments in the Indonesian, Philippine, Malaysian, and Thai emerging stock
markets. Meric et al.’s results indicate that the U.S. investors could increase their
investment returns by diversifying on the Indonesian, Philippine, Malaysian, and Thai
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emerging stock markets. Moreover, research conducted by Haran et al. (2016) examined
the extent and nature of inter-relationships between three emerging real estate markets
namely, the Czech Republic, Hungary, and Poland. Haran et al. (2016) found that there
was lack of relationship (e.g., uniformity) among the markets. Haran et al.’s (2016)
findings indicate that geographical diversification on those European emerging real estate
markets was effective in terms of performance enhancement, thus, increasing investment
returns. Furthermore, Mimouni et al. (2016) explored whether recent oil stocks and
financial events have significant impact on the conditional correlations and
diversification benefits of investments. Mimouni et al.’s (2016) findings showed that the
correlation in Gulf Corporation Council (GCC) oil-producing countries (e.g., Saudi
Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain, and Oman) stock markets
remained low and constantly offered high diversification benefits. The findings indicate
that geographical diversification on the emerging and oil-producing countries offered
more potential for international diversification to increase investment returns (Haran et
al., 2016).
However, other research findings are contrary to the findings of this study.
Bobillo et al. (2008), Cai et al. (2016), Chu-Sheng (2010), Gocmen (2010), Maldonado
and Saunders (1981), and Raju and Khanapuri (2010), and Singh, Kumar, and Pandey
(2010) found that due to the globalization of markets among countries, the benefits of
geographical diversification in increasing investment returns have diminished.
Specifically, Singh et al. (2010) examined how diversified investments in Asia, Europe,
and North America performed with regards to interdependence and influence of one
market on the other. Singh et al.’s (2010) findings showed that there was a greater
129
interdependency and influences of one market on another such that there was no trend of
increased returns of the geographically diversified investments. Similarly, Raju and
Khanapuri (2010) examined the performance of U.S. investors’ diversified financial
investments in six Asian markets (e.g., KOSPI of South Korea, Shanghai Composite,
SSEC of China, KLSE Composite of Malaysia, QKSE Composite of Indonesia, SET of
Thailand, and NSE Nifiy of India). The findings from Raju and Khanapuri (2010)
showed that investments that were diversified in the Asian financial markets did not
increase returns nor did the diversification reduce risks. Moreover a study conducted by
Cai et al. (2016) found that investors incurred higher operating costs as the level of
diversification increased. Cai et al.’s (2016) results suggest a potential tradeoff between
economic gains (e.g., market shares or interest margins) and operating costs due to
expansion of investments across different countries. Results indicated that the
geographical diversification has a positive but insignificant impact on return on asset
(ROA) (Cai et al., 2016).
The differences among advocates of the strategies and challenges associated with
internationalization of financial markets have prompted interest in exploring and
understanding investors’ behaviors with regards to using a strategy that might not
increase investment returns (Fenzel & Pelzmann, 2012; Shiller, 2003). The findings of
this study showed that participants’ positive perceptions of the emerging and growing
foreign markets were due to stability, rapid returns, and specific industries (e.g., real
estate or oil). The findings of this study showed that participants’ investment behaviors of
using the geographical diversification strategy were consistent with behavioral finance
theory. The findings of this study showed that participants’ perception of geographical
130
diversification strategy to increase investment returns influenced their investment
decisions. Studies conducted by Harras and Somette (2011) and Rose et al. (2010) found
that investors’ positive perceptions of investment outcomes influenced their investment
decisions to invest more. Similarly, findings from Jing et al. (2013) and Yu and Xiaosong
(2015) showed that investors’ confidence in the diversification strategy also influenced
investment decisions. Moreover, Hoffmann, Post, and Pennings (2015) found when
investors perceived investment returns as having higher and upward expectations; they
invested more of their portfolios in such investments.
The findings of this study have practical implications for investors, financial
planners, and researchers because the participants’ use of geographical diversification
strategy in real estate and oil industries on emerging and growing markets helped
increased their investment returns (Haran et al., 2016; Meriç et al., 2016). The practical
implications for the findings of this study are that when the geographical diversification
strategy is appropriately applied, the use of the strategy might result in increasing
investment returns (Haran et al., 2016; Meriç et al., 2016). The findings of this study
explain that when the geographical diversification strategy is appropriately applied, in
diversified investment in the real estate and oil industries on emerging and growing
markets, the strategy might help investors increase investment returns. The implications
of the findings are based on Haran et al. (2016), Hargis and Mei (2006), Markowitz
(1959), Masron and Fereidouni (2010), Meriç et al. (2016), Odier and Solnik (1993),
Saiti, Bacha, and Masih (2014), Solnik (1974), Srivastava (2007), and Torres GarcíaHeras’ (2011) findings that the geographical diversification strategy helped to increase
investment returns. Therefore, investors should carefully analyze their emotions and
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financial information while making investment decisions, which could lead to increasing
investment returns (Fenzel & Pelzmann, 2012; Hyoyoun & Wook, 2013; Jing et al.,
2013; Peteros & Maleyeff, 2013; Shiller, 2013; Kahneman & Tversky, 1979; Yu &
Xiaosong, 2015).
The findings of this study are consistent with behavioral finance theory because
investors’ perceptions of the geographical diversification strategy influenced their
decision-making process, and thus, their investment behaviors cannot be explained by the
conventional finance theory (Fenzel & Pelzmann, 2012; Hyoyoun & Wook, 2013;
Peteros & Maleyeff, 2013; Shiller, 2003; Kahneman & Tversky, 1979). For example,
Harras and Somette (2011) and Rose et al. (2010) found that investors’ positive
perceptions of investment outcomes influenced their investment decisions to invest more.
Similarly, investors’ confidence in the diversification strategy also influenced investment
decisions (Jing et al., 2013; Yu & Xiaosong, 2015). The findings of this study showed
that participants’ perception of geographical diversification strategy to increase
investment returns influenced their investment decisions. The findings of this study are
consistent with some previous studies that found that perception of confidence in the
markets motivated investors to make investment decisions (Hoffmann et al., 2015; Jing et
al., 2013). In line with the conclusions of this study, when investors perceived investment
returns as having higher and upward expectations, they invested more of their portfolios
in such investments (Hoffmann et al., 2015). Therefore, in order to understand the
investors investment behaviors, financial researchers should recognize that investors’
investment behaviors are consistent with behavioral finance theory (Fenzel & Pelzmann,
132
2012; Hyoyoun & Wook, 2013; Jing et al., 2013; Peteros & Maleyeff, 2013; Shiller,
2003; Kahneman & Tversky, 1979; Yu & Xiaosong, 2015).
Research Question 3: How do U.S. investors describe their perceptions of
geographical diversification as a strategy for reducing investment risks? Participants
in this study perceived the geographical diversification is an effective investment strategy
for reducing investment risks. The findings in this study are consistent with findings of
Haran et al. (2016), Hargis and Mei (2006), Markowitz (1959), Masron and Fereidouni
(2010), Meriç, Jie, and Meriç (2016), Odier and Solnik (1993), Saiti, Bacha, and Masih
(2014), Solnik (1974), Srivastava (2007), and Torres García-Heras (2011), because the
investors perceived the geographical diversification strategy as effective in reducing their
investment risks. Participants’ responses to their perceptions of continued use of the
geographical diversification strategy to reduce investment risks demonstrated their
application of behavioral finance to the geographical diversification strategy.
Specifically, participants’ positive perceptions of the emerging and growing foreign
markets were based on the ability to diversify the investment on the markets to reduce
investment risks. Participants perceived the real estate and oil markets as providing
investment stability hence the participants’ preference for using the geographical
diversification strategy to reduce investment risks. A study conducted by Masron and
Fereidouni (2010) examined the portfolio diversification benefits of the housing industry
and the relationship between housing performance and inflation in Iran. Using the riskto-reward ratio, Masron and Fereidouni (2010) examined the risk-adjusted performance
of housing and other financial assets. Masron and Fereidouni (2010) found that
diversification in the housing industry provided more benefits than risks and investments
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in the housing industry, which resulted in lowest risk-to-reward ratio. In another study,
Torres García-Heras (2011) examined the effectiveness of using geographical
diversification to reduce risk by analyzing the credit default swap (CDS) markets in the
U.S., France, Germany, PIIS (e.g., Portugal, Ireland, Italy, Greece and Spain), and
Mexico and South America (e.g., Argentina, Brazil, Chile, Columbia and Peru). Torres
García-Heras (2011) found that the South American countries experienced lower risk
with diversified investments than most developed European countries, especially Spain.
Similarly, a study conducted by Mimouni et al. (2016) found that the correlation in Gulf
Corporation Council (GCC) oil-producing countries (e.g., Saudi Arabia, Kuwait, the
United Arab Emirates, Qatar, Bahrain, and Oman) stock markets remained low and
constantly offered high diversification benefits for reducing investment risks. The
findings from Masron and Fereidouni (2010), Mimouni et al. (2016), and Torres GarcíaHeras (2011) indicated that the geographical diversification on the emerging and oilproducing countries offered more potential for international diversification to reduce
investment risks. Additionally, the findings from the Yavas and Dedi (2016) showed that
the geographical diversification investments on Turkish and Russian markets were
exposed to more volatility than Austria, Germany and Poland markets. Yavas and Dedi
(2016) findings indicated that geographical diversification on Austria, Germany, and
Poland’s markets had less risk and could be used to reduce investment risks.
However other research findings are contrary to the findings of this study. Cai et
al. (2016), Chu-Sheng (2010), Gocmen (2010), Maldonado and Saunders (1981), Singh et
al. (2010), and Raju and Khanapuri (2010) found that due to the globalization of markets
among countries, the benefits of geographical diversification in reducing investment risks
134
might not be effective. Specifically, Singh et al. (2010) examined how diversified
investments in Asia, Europe, and North America performed with regards to
interdependence and influence of one market on the other. Singh et al.’s (2010) findings
showed that there was a greater interdependency and influences of one market on another
such that there was no trend of decreased risks of the geographically diversified
investments. Similarly, Raju and Khanapuri (2010) examined the performance of U.S.
investors’ diversified financial investments in six Asian markets. The findings from Raju
and Khanapuri (2010) showed that investments that were diversified in the Asian
financial markets did not result in reducing investment risks. Similarly, Cai et al. (2016)
found that a potential tradeoff between economic gains (e.g., market shares or interest
margins) and operating costs from the expansion of investments across different countries
makes the geographical diversification strategy ineffective for increasing returns and
reducing risks. Findings from Cai et al. (2016) showed that the geographical
diversification had a positive but insignificant impact on return on asset (ROA).
The differences among advocates of the strategies and challenges associated with
the globalization of the financial markets have prompted interest in exploring and
understanding investors’ behaviors with regards to using the geographical diversification
strategy to reduce investment risks (Fenzel & Pelzmann, 2012; Shiller, 2003). The
findings of this study showed that participants’ positive perceptions of the emerging and
growing foreign markets were due to stability, rapid returns, and specific industries (e.g.,
real estate or oil). Results of this study showed that participants perceived the real estate
and oil markets as providing investment stability, hence the participants’ preference for
using the geographical diversification strategy to reduce investment risks. The
135
implications of the findings of this study indicate that participants’ investment behaviors
are consistent with the application of behavioral finance theory to the geographical
diversification strategy for reducing investment risks. The findings of this study showed
that participants’ perception of geographical diversification strategy to reduce investment
risks influenced their investment decisions. The findings of this study are supported by
some studies conducted by Chassot, Hampl, and Wustenhagen, (2014), Hoffmann et al.’s
(2015), Paruchuri and Misangy (2015), Roszkowski and Davey (2010), and Srivastava
(2007), which found that investors’ perceptions of investment portfolios, as low risks,
influenced their decisions to invest more of their portfolios. A study conducted by
Roszkowski and Davey (2010) found that before the financial crisis, investors’
perceptions of risk were low and risk tolerance was high. However, after the financial
crisis, investors’ perceptions of risk elevated from low to high and their risk tolerance
changed from high to low (Roszkowski & Davey, 2010). Roszkowski and Davey’s
findings indicate that investors’ financial decisions were influenced by their behavior.
The findings of this study have practical implications for investors, financial
planners, and researchers because the participants’ use of geographical diversification
strategy, in real estate and oil industries, on emerging and growing markets helped
reduced their investment risks (Chassot et al., 2014; Haran et al., 2016; Meriç et al.,
2016; Paruchuri & Misangy, 2015). The practical implications of the findings of this
study are that the appropriate application of the geographical diversification strategy may
result in reducing investment risks (Haran et al., 2016; Hoffmann et al., 2015; Meriç et
al., 2016; Paruchuri & Misangy, 2015). The findings of this study are supported by the
results from Chassot et al. (2014), Hoffmann et al. (2015), Paruchuri and Misangy
136
(2015), and Roszkowski and Davey (2010), which are consistent with the application of
behavioral finance theory to the geographical diversification strategy. Findings showed
that investors’ perceptions of regulatory exposure risk influenced their investment
decision-making (Chassot et al., 2014). For example, results showed that when the
venture capitalist investors perceived the regulatory exposure as high risk, they made less
investment decisions in the renewable energy companies (Chassot et al., 2014). On the
contrary, when the venture capital investors perceived the regulatory risk as low risk,
they invested more of their portfolios (Chassot et al., 2014). Similarly, Paruchuri and
Misangy (2015) investigated how investors’ perceptions of corporate misconduct
influenced general public opinion of the corporation. The authors examined 725 firms
across U.S. financial markets by assessing 84 financial misconducts. Using the
cumulative abnormal return (CAR), Paruchuri and Misangy (2015) found that when
investors have perceptions of misconduct in financial corporations, such perceptions of
misconduct are generalized to other corporations in the same financial industry creating a
ripple effect. Moreover, Hoffmann et al. (2015) found that financial investors who
perceived investment returns as having higher and upward expectations invested more of
their portfolios in such investments. Hoffmann et al. (2015) found that investors who
demonstrated high-risk tolerance held riskier investments for longer periods.
Additionally, participants with higher risk perceptions had higher turnover than their
counterparts with lower risk perceptions of investment. Furthermore, financial investors
with higher revision of risk tolerance demonstrated higher buy-sell ratios than
participants with higher revision of risk perception, who showed lower buy-sell ratios
(Hoffmann et al., 2015). When investors had perceptions of lower risk on investments,
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they made investment decisions of not only trading more but also holding their portfolios
for an extended period of time (Hoffmann et al., 2015). The findings of this study
contribute to behavioral finance that it is important for financial practitioners and
researchers to understand how the investors’ perception influenced their investment
decisions (Hoffmann et al., 2015).
The findings of this study explain the practical implications that when the
geographical diversification strategy is appropriately applied in diversified investments,
specifically in real estate and oil industries on emerging and growing markets, the
strategy may help investors reduce investment risks. These implications of this study’s
findings are based on Haran et al. (2016), Hargis and Mei (2006), Markowitz (1959),
Masron and Fereidouni (2010), Meriç, Jie, and Meriç (2016), Odier and Solnik (1993),
Saiti, Bacha, and Masih (2014), Solnik (1974), Srivastava (2007), and Torres GarcíaHeras’ (2011) findings that the geographical diversification strategy helped to reduce
investment risks. The implications of the findings are also premised on investors’
application of geographical diversification strategy in real estate and oil industries on
emerging and growing markets to reduce investment risks (Haran et al., 2016; Meriç et
al., 2016; Saiti et al., 2014; Yavas & Dedi, 2016). Finally, the findings of this study
indicate that participants’ investment decisions are consistent with behavioral finance
(Chassot et al., 2014; Duxbury, 2015; Hoffmann et al., 2015; Paruchuri & Misangy,
2015; Roszkowski & Davey, 2010). The findings of this study indicate that the
participants’ use of geographical diversification in real estate and oil industries on
emerging and growing markets helped reduced their investment risks (Haran et al., 2016;
Meriç et al., 2016; Saiti et al., 2014; Yavas & Dedi, 2016). The implications of the
138
findings are that when participants had prudent perceptions of investment risks, their
geographical diversification strategy might help reduce their investment risks (Haran et
al., 2016; Meriç et al., 2016; Saiti et al., 2014; Yavas & Dedi, 2016). On the contrary,
when the investors’ perceive potentially high risk investments as low risk, their
investment strategy may result in high investment risks (Haran et al., 2016; Meriç et al.,
2016; Saiti et al., 2014; Yavas & Dedi, 2016). Therefore, it is incumbent on investors to
recognize the impact of their perceptions of the geographical diversification strategy and
carefully analyze their perceptions of the strategy to be able to make investment
decisions, which could lead to reducing investment risks. Moreover, financial planners
and financial researchers should recognize that investors’ perceptions of the strategy
influenced their investment decisions, which could lead to making profitable or risky
investment decisions (Jing et al., 2013; Yu & Xiaosong, 2015).
Research Question 4: How do U.S. investors explain their use of geographical
diversification strategy, in the context of literature, which does not support the
strategy? The findings of this study showed that participants believed geographical
diversification strategies were working for them by increasing their investment returns
and reducing their investment risks. Research suggests anchoring bias can lead to more
irrational investing behavior because the investor ignores other information in favor of
familiar information (Rose et al., 2010; Wang et al., 2011). While anchoring bias of the
participants in this study led to increased returns and reduced risks, investment decisions
based on anchoring bias could result in reduced returns and increased risks. The findings
of this study showed that participants of this study believed they had adequate
information on the geographical diversification strategy to make profitable investment
139
decisions. According to Pandit and Ken (2014) when investors believed that they have
adequate information on financial products, they made more investment on such
products. On the contrary, investors would make fewer purchases of shares and postpone
more purchasing of shares when their knowledge on the shares is less (Pandit & Ken,
2014). The results of this study showed that participants did not plan to change their
investing behavior, even though the majority of participants were not familiar with the
financial literature suggesting that the geographical diversification strategy is ineffective.
The findings showed that participants in this study valued their own experience over the
financial literature. As a result of those beliefs, they had negative feelings about the
financial literature, which contradicted their own experiences. The implications of the
findings in this study are that participants’ investment decisions were influenced by their
psychological bias (Hyoyoun & Wook, 2013; Muradoglu & Harvey, 2012; Peteros &
Maleyeff, 2013).
The influence of investors’ decisions by their psychological biases as shown in
this study cannot be explained by conventional finance theory approach that assumes
investors who use geographical diversification strategy are rational investors (Friedman
& Savage, 1948; Markowitz, 1959; Masron & Fereidouni, 2010). The participants’
investment behaviors are consistent with behavioral finance theory (Fenzel & Pelzmann,
2012; Hyoyoun & Wook, 2013; Peteros & Maleyeff, 2013; Shiller, 200; Kahneman &
Tversky, 1979). Advocates of behavioral finance theory consider how various
psychological characteristics, such as anchoring biases, emotions, and perceptions
influence financial decision-making processes of investors and financial planners
(Hyoyoun & Wook, 2013; Peteros & Maleyeff, 2013). Financial investors’ decisions are
140
bias and in favor of familiar financial information over unfamiliar information (Lai et al.,
2010). A study conducted by Chaarlas and Lawrence (2012) demonstrated that regardless
of the available financial information, investors’ decisions were influenced by their
anchoring bias. Similarly, as indicated by Gupta and Banik (2013), 95% of financial
investors demonstrated psychological bias when making investment decisions.
Participants in this study believed in the strategy, relied on their own experience, and
avoided the financial literature, which contradicted their own experiences. The findings
of this study are consistent with Yu and Xiaosong’s (2015) findings that investors’
decisions are based on individual cognitive prejudices rather than rational financial
evidence. Ateş et al.’s (2016) findings showed that investors based their decisions on
informal sources of financial information. Investors’ humanistic behaviors are important
to researchers because understanding these behaviors helps researchers explore and
develop effective strategies for financial investors. Financial investors should control
psychological biases in order to make profitable and sound investment decisions and
thereby become better investors (Suresh, 2013). The findings explain that investors need
to recognize that their anchoring bias, during decision making, has the potential to
influence them to make prudent or less than optimal investment decisions.
Acknowledging, understanding, and modifying the behavioral biases of the financial
investors and controlling such biases caused the investors to make profitable and sound
investment decisions and thereby become better investors (Suresh, 2013).
Recommendations for application
The first recommendation for application of this study pertains to the influence of
emotions on investment decisions. Positive or negative emotional feelings, during
141
investment decision-making, have different influences on investors’ decisions (Duxbury,
2015; Muradoglu & Harvey, 2012; Peteros & Maleyeff, 2013). The findings explain that
participants in this study demonstrated positive emotional feelings when making decision
that are consistent with previous studies’ findings (Duxbury, 2015; Muradoglu & Harvey,
2012; Peteros & Maleyeff, 2013). The findings show that participants in this study
avoided making decision when their emotions were negative. However, other research
has suggested negative emotions could lead to more rational investing behavior (Chu et
al., 2012; Van de Laar & de Neubourg, 2006). It is recommended that investors critically
assess their emotional feelings and regulate those emotions during decision-making in
order to make beneficial investment decisions. This recommendation is based on the
finding in this study and consistent with Fenton-O'Creevy et al.’s (2011) findings.
Financial investors who critically analyzed their emotions and financial information
available before making investment decisions were more likely to make profitable
decisions (Fenton-O'Creevy et al., 2011). The responses from participants demonstrated
the applicability of the behavioral finance theory to the geographical diversification
strategy (Duxbury, 2015; Muradoglu & Harvey, 2012; Peteros & Maleyeff, 2013). The
findings of this study contribute to literature by extending behavioral finance theory to
the geographical diversification strategy (Duxbury, 2015; Muradoglu & Harvey, 2012;
Peteros & Maleyeff, 2013). When investors analyzed their emotions before making
investment decisions, the investors’ decisions might lead to increasing investment returns
and reducing investment risks (Duxbury, 2015; Muradoglu & Harvey, 2012; Peteros &
Maleyeff, 2013). Increased investment returns and reducing investment risks may help
reduce or prevent financial crises that occurred in 2007-2008 (Chu-Sheng, 2010;
142
Geambasu et al., 2013). Investors’ failure to critically analyzed their emotions and
financial information available before making investment decisions may result in
decreased investment returns and increased investment risks (Chu-Sheng, 2010;
Geambasu et al., 2013).
The second recommendation for application of this study is regarding the
effectiveness of geographical diversification and investors continued use of the strategy
as a way of increasing returns and reducing risks. The findings of this study showed that
participants’ positive perceptions of the emerging and growing foreign markets were due
to stability, rapid returns, and specific industries such as real estate or oil markets (Haran
el al., 2016; Masron & Fereidouni, 2010; Mimouni et al., 2016; Roszkowski & Davey,
2010; Saiti et al., 2014; Srivastava, 2007; Torres García-Heras, 2011). Specifically,
Haran et al. (2016) and Masron and Fereidouni (2010) found that geographical
diversification in real estate industry in emerging and growing markets increased returns
and reduce risks. Similarly, Mimouni et al.’s (2016) findings indicated geographical
diversification in oil-producing emerging and growing markets had less risk and could be
used to increase returns and reduce investment risks. Other research by Bobillo et al.
(2008), Cai et al. (2016), Chu-Sheng (2010), Gocmen (2010), Maldonado and Saunders
(1981), Singh et al. (2010), and Raju and Khanapuri (2010) found that the geographical
diversification strategy was ineffective in increasing returns and reducing risk due to the
interdependence of the global markets.
The third recommendation for application in this study is regarding the investors’
investment decisions and their anchoring bias behaviors. The findings in this study
showed that participants valued their own experience over the financial literature. As a
143
result of those beliefs, they had negative feelings about the financial literature, which
contradicted their own experiences. This indicates that participants continued use of
geographical diversification was influenced by their anchoring bias of the strategy, which
is consistent with results from Chaarlas and Lawrence (2012), Gupta and Banik (2013),
and Kapor (2014). On the contrary, Rose et al. (2010) and Wang et al. (2011) found that
anchoring bias could lead to more irrational investing behaviors. Although investment
decisions of participants in this study led to increased returns and reduced risks,
investment decisions based on anchoring bias could result in reduced returns and more
risks. Anchoring biases continues to influence financial investors’ decision-making
processes, regardless of the value of the financial information available to investors
(Chaarlas & Lawrence, 2012). The investors’ investment behaviors, where their
decisions are influenced by their own experience over financial literature are consistent
with behavioral finance (Chaarlas & Lawrence, 2012; Chu-Sheng, 2010; Geambasu et al.,
2013). The researcher recommends that investors should recognize, analyze, and control
their emotional feelings, perceptions, and psychological biases in order to make
increasingly beneficial investment decisions. Investors’ failure to critically analyze their
psychological biases before making investment decisions could result in decreasing
investment returns and increasing investment risks (Chu-Sheng, 2010; Geambasu et al.,
2013).
Recommendation for future research
The recommendation for future research of this study is related to the participants’
responses that the geographical diversification strategy, in real estate and oil industries,
on emerging and growing markets helped increased their investment returns and reduced
144
their investment risks (Haran el al., 2016; Masron & Fereidouni, 2010; Mimouni et al.,
2016; Roszkowski & Davey, 2010; Saiti et al., 2014). The researcher recommends that
future quantitative studies should be conducted to evaluate the effectiveness of
geographical diversification on the real estate and oil markets of the emerging and
growing countries in Africa, Asia, Eastern Europe, and South America. Specifically, a
quantitative study that provides an estimation of time period that investors take to
increase their returns and reduce their risk and by how much as a results of their
investments in real estate and oil industries, on emerging and growing African, Asian,
Eastern European, and South American markets. The outcomes of the quantitative
research study may contribute to financial literature by providing quantitative information
on the investors’ perceptions of increased returns and reduced risks in addition to helping
to strengthen the geographical diversification strategy (Haran el al., 2016; Masron &
Fereidouni, 2010; Mimouni et al., 2016).
Conclusions
Investors continued to use geographical diversification as an investment strategy
to increase investment returns and reduce investment risks, in spite of financial literature
that says the strategy is not effective. The participants continued use of the strategy is
because investors perceived geographical diversification as an effective strategy to
increase investment returns and reduce investment risks. Moreover, investors make
investment decisions based on their emotional feelings and psychological biases. The
investors’ perceptions of the strategy, their emotional feeling when making investment
decisions and their psychological bias in favor of the strategy, influenced their investment
decisions. A qualitative case study was conducted to understand the U.S. investors’
145
perceptions and emotions of using geographical diversification, as an investment strategy,
when evidenced does not support it use. Based on the findings of this study, the
researcher made three major conclusions, which incorporated practical and researchbased implications.
The majority of participants in this study thought having positive emotional
feelings during investment decision-making would lead to positive investment behavior,
thus, they made investment decisions when they felt positive emotions and avoided
decisions when they felt negative. The researcher was able to draw conclusion with
implications for investors, financial practitioners, and future research. First, investors
should recognize that their emotional feelings influenced them during investment
decisions. Secondly, financial practitioners and researchers should acknowledge that
different emotional feelings positive or negative, influence investors differently to make
beneficial or less than optimal investment decisions. Thirdly, investors, financial
practitioners, and researchers should understand that geographical diversification in real
estate and oil industries, on emerging and growing markets, may help investors increase
investment returns and reduce investment risks. The final implication is that anchoring
bias of the participants in this study led to increase returns and reduced risks. According
to research conducted by Akerlof and Shiller (2010), Duxbury (2015), Gupta and Banik
(2013), Kahneman (2011), Mitroi and Oproiu (2014), and Tekçe et al. (2016), financial
investors have a tendency to make investment decisions based on psychological biases.
Understanding and regulating investors’ psychological biases may help investors make
profitable investment decisions (Duxbury 2015; Mitroi & Oproiu, 2014; Tekçe et al.,
2016).
146
Four recommendations were made for investors, financial practitioners, and
researchers. First, it is recommended that investors critically assess their emotional
feelings and regulate those emotions during decision-making in order to make beneficial
investment decisions. Secondly, the researcher recommends that investors assess the
emerging and growing real estate and oil markets before diversifying their portfolios on
such markets in order to increase returns and reduce risks. Thirdly, the researcher
suggests future quantitative studies should be conducted to evaluate the effectiveness of
geographical diversification on the real estate and oil markets of the emerging and
growing countries in Africa, Asia, Eastern Europe, and South America. Finally, investors
should recognize, analyze, and control their emotional feelings, perceptions, and
psychological biases in order to make more beneficial investment decisions.
147
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Appendixes
162
Appendix A: Recruitment Notice on Social Network Websites
RESEARCH PARTICIPANTS NEEDED
My name is Samuel Antwi. I am a doctoral student at Northcentral University. I am
conducting a research study on U.S. financial investors’ thoughts and feelings about
investing their money across different countries as way to increase profits and decrease
risks. You are eligible to participate in this research if you are at least 18 years old, live
or work in the Washington DC Metropolitan Area, and invest your money across
different countries. As a participant in my study, you will do one interview (up to 90
minutes) and also you will complete 3 journal entries about your feelings and thoughts
when making financial investment decisions (up to 1 hour total). You will also be asked
to review your interview responses for accuracy (up to 30 minutes). If you are interested
in participating in this study or have questions, please email me at
s.antwi2313@email.ncu.edu.
163
Appendix B: Recruitment and Screening Email Response
Dear Name of Participant,
Thank you for your quick response to take part in my study. This study will explore U.S.
investors’ thoughts and feelings about investing their money across different countries as
an investment strategy.
As a participant in my study, you will be asked to complete an interview to collect your
thoughts about diversifying your investments across different countries. The interview
will last up to 90 minutes. After the interview, you will be asked to review your interview
transcript for accuracy and email any changes to me within one week. The review may
take up to 30 minutes. In addition to the interview, you will be asked to complete 3
journal entries over 4 weeks about your feelings and thoughts when making an
investment decision. The journal entries may take up to 60 minutes. The informed
consent form is attached to this email and will provide more details on participation. Any
information you share about yourself and your identity will be kept confidential.
To make sure that you meet the requirements for the study, I need you to answer three
brief questions. These questions require yes/no answer questions. No elaboration is
required. The answers to these questions do not obligate you to participate in the study.
Even if you are selected to participate, you can opt out at any time.
1. Are you at least 18 years old?
2. Do you currently work or live in the Washington DC Metropolitan Area?
3. Do you invest your money in different countries?
If you answered “yes” to all the three questions above, the next step is to set a time for
our interview. We can do the interview over the phone or in person. If you prefer an in
person interview, please suggest a convenient public place (with private space, such as a
public library) where we could meet.
For your convenience, I will let you choose the date and time. I would suggest choosing a
day and time when interruptions can be held to a minimum. When you reply to this email,
please include your preference for the date, time, and location of the interview.
In my reply email, I will confirm our interview appointment. If I have already scheduled
the planned number of interviews, you will be asked to be on a waiting list in case
additional participants are need.
Thank you,
Samuel Antwi
Northcentral University Doctoral Student
s.antwi2313@email.ncu.edu
164
Appendix C: Informed Consent
Introduction
My name is Samuel Antwi. I am a doctoral student at Northcentral University. I am
conducting a research study on U.S. investors’ thoughts and feelings about investing their
money across different countries as a way to increase profits and decrease risks. I am
completing this research as part of my doctoral degree. I invite you to participate.
Activities:
If you participate in this research, you will be asked to:
1. Answer interview questions. You can choose to answer the interview
questions in person or by phone. The interview may take up to one hour and
30 minutes.
2. Complete three journal entries within four weeks in the template provided.
This activity will take you up to 1 hour total.
3. Review your interview responses for accuracy. Email any changes to me
within seven days. This activity may take you up to 30 minutes.
Eligibility:
You are eligible to participate in this research if you:
1. Are at least 18 years of age
2. Work or live in the Washington DC Metropolitan Area
3. Invest your money across different countries
You are not eligible to participate in this research if you:
1. Are under 18 years of age
2. Do not work or live in Washington DC Metropolitan Area
3. Do not invest your money across different countries
I hope to include 10 to 12 people in this research.
165
Risks:
There are minimal risks in this study. Some possible risks include: A total of up to three
hours of your time will be used to answer interview questions, complete three journal
entries, and review your interview responses for accuracy.
To decrease the impact of these risks, you can: skip interview questions, skip journal
entries, skip review of interview transcript, or stop participation at any time.
Benefits:
If you decide to participate, there are no direct benefits to you.
The potential benefits to others are: Researchers and financial practitioners may use the
results to help change investors’ behavior in order to increase profits and decrease risks.
Confidentiality:
The information you provide will be kept confidential to the extent allowable by law.
Some steps I will take to keep your identity confidential are: When I am reporting the
information, all participants will be identified only as participant 1, 2, 3, or a, b, c, etc. to
maintain your confidentiality.
The people who will have access to your information are: Me, my committee chair, and
committee members. The Institutional Review Board may also review my research and
view your information.
I will secure your information with these steps: I will securely keep the information in the
Microsoft Word document. I will be the only person who knows the password on the
document. The computer and other information will be securely locked in a cabinet in my
home office.
I will keep your data for 7 years. Then, I will delete electronic data and destroy paper
data.
Contact Information:
If you have questions for me, you can contact me at: s.antwi2313@email.ncu.edu. Phone:
1-888-327-2877
My dissertation chair’s name is Dr. Stephanie Wallio. She works at Northcentral
University and is supervising me on the research. You can contact her at:
SWallio@ncu.edu. Phone: 1-888-327-2877.
166
If you have questions about your rights in the research, or if a problem has occurred, or if
you are injured during your participation, please contact the Institutional Review Board
at: irb@ncu.edu or 1-888-327-2877 ext 8014.
Voluntary Participation:
Your participation is voluntary. If you decide not to participate, or if you stop
participation after you start, there will be no penalty to you. You will not lose any benefit
to which you are otherwise entitled.
Audiotaping:
I would like to use a voice recorder to record your responses. You cannot participate if
you do not wish to be recorded.
Please sign here if I can record you:
Signature:
A signature indicates your understanding of this consent form. You will be given a copy
of the form for your information.
Participant Signature
Printed Name
Date
Researcher Signature
Printed Name
Date
167
Appendix D: Participation Confirmation Email
Dear Potential Participant,
Thank you for your interest to take part in my research. This study will explore U.S.
investors’ thoughts and feelings regarding investing their money across different
countries as an investment strategy.
I wanted to confirm our interview appointment at DAY, TIME, and PLACE.
I am re-sending the informed consent document with this email.
If your interview will occur by phone, please print and sign the informed consent
document after reading it, scan it, and email to me before your interview appointment. If
you prefer to mail back a hard copy of the signed document, please reply to this email
asking for my mailing address.
If your interview will occur in person, please print and sign the informed consent
document after reading it and bring a signed copy with you to the interview. I will also
have a copy at the interview if you forget. I will like to remind you that the interview will
last for up to 90 minutes.
You will not be able to take part in the interview until I have a signed copy of the
informed consent document from you.
If you have any questions or concerns after reading it, please contact me.
Thank you,
Samuel Antwi
Northcentral University Doctoral Student
s.antwi2313@email.ncu.edu
168
Appendix E: Email Response to Unqualified Applicant
Dear Participant Name,
Thank you for your interest in participating in my research to explore U.S. financial
investors’ thoughts and feelings regarding their use of investing their money across
different countries as an investment strategy.
Based on your responses, you do not meet the requirements for participating in the study.
Thank you once again for your interest to take part in the study. If you would like to
receive a summary of the study’s results when the research is complete, please reply to
this email.
Samuel Antwi
Northcentral University Doctoral Student
s.antwi2313@email.ncu.edu
169
Appendix F: Participant Waiting List Email
Dear (Name):
Thank you for your interest in participating in my research to investigate U.S. financial
investors’ thoughts and feelings about investing their money across different countries as
an investment strategy.
Sometimes more people express interest than a study was planned to include, therefore
your participation in the study is not needed right now.
But your name will be placed on the waiting list and I will contact you as soon as
possible if I need additional participants to take part in the research.
Please feel free to contact me if you have any questions.
Thank you,
Samuel Antwi
Northcentral University Doctoral Student
S.Antwi2313@email.ncu.edu
170
Appendix G: Participation Not Needed Due to Data Saturation Email
Dear (Name):
Thank you for your continued interest to take part in my research and your patience to
stay on the waiting list.
All the interview spaces were filled and the study has ended.
I am happy to give you a summary of the study results as soon as the research is
complete.
Please let me know if you are interested in receiving a copy of the research results. Feel
free to contact if you have any questions.
Thanks,
Samuel Antwi
Northcentral University Doctoral Student
S.Antwi2313@email.ncu.edu
171
Appendix H: Interview Questions
Demographic Data
1. Describe your investment experience.
2. What is your area of work?
3. What is your highest educational level? What was your degree in?
4. In what city and state do you work and live?
5. What is your age?
6. Describe investing your money across different countries as an investment
strategy.
As I ask more questions, think about times you have made a decision to use geographical
diversification.
Emotions and Geographical Diversification Strategy
7. Describe your feelings when you are deciding to use geographical diversification.
8. How do your feelings influence your decision to diversify your money across
different countries?
Perception, Geographical Diversification Strategy, and Investment Returns
9. Tell me your thoughts about using geographical diversification as a strategy to
increase investment returns.
10. What has shaped your opinions about using geographical diversification as a
strategy to increase investment returns?
11. What about geographical diversification makes it an appealing strategy to increase
investment returns?
Perception, Geographical Diversification Strategy, and Investment Risks
12. Tell me your thoughts about using geographical diversification as a strategy to
reduce investment risks.
13. What has shaped your opinions about using geographical diversification as a
strategy to reduce investment risks?
14. What about geographical diversification makes it an appealing strategy to reduce
investment risks?
Strategy of Geographical Diversification and Literature
15. Are you aware of financial literature that says the geographical diversification
strategy is not effective?
16. What are your feelings and thoughts about financial literature that says the
geographical diversification strategy is not effective?
17. What are your thoughts about continuing to use geographical diversification given
that literature? If you will continue to use it, why?
172
This activity of answering the interview question will take you up to 1 hour and 30
minutes
173
Appendix I: Journaling Instructions
Dear (Name):
Thank you for taking part in my research study to explore U.S. financial investors’
thoughts and feelings regarding investing their money across different countries as an
investment strategy.
Using the attached journal template in the form of MS Word document, please complete
three journal entries in four weeks. Open and use “Save As” to save the journal template
with your first initial and last name and journal number. For example, if I were to journal
three entries, they would be saved as santwi1, santwi2, and santwi3, respectfully. Using
this instruction, please email your journal entries to me as you complete them. This
activity will take you up to 60 minutes.
If you have any questions, please contact me directly at the email below. Thank you for
your participation.
Samuel Antwi
Northcentral University Doctoral Student
S.Antwi2313@email.ncu.edu
174
Appendix J: Journal Template
Date:
Participant Name:
Participant Email:
Please describe what happens as you make investment decisions related to investing your
money across different countries as an investment strategy. Write on the following in the
boxes below:
•
Your feelings when you are making decision on investment;
•
Your mood at time of making decision on investment;
•
Your thoughts when you are making decision on investment
175
Appendix K: Member Validation of Recorded Responses Email
Dear (Name):
Thank you for taking part in my research study to explore U.S. financial investors’
thoughts and feelings regarding investing your money across different countries as an
investment strategy.
The transcript of your interview is attached. Please go through your answers to the
questions to make sure what you said during the interview accurately reflects your
perceptions. You may wish to request changes to remove or clarify something you said.
Please email your response to me within one week to enable me to continue with the
research. You may make changes directly in the transcript or let me know that no changes
are needed. This activity will take you up to 30 minutes. If I do not hear from you within
one week, I will assume your transcript is accurate.
Feel free to contact if you have any questions.
Thanks,
Samuel Antwi
Northcentral University Doctoral Student
S.Antwi2313@email.ncu.edu