A 26-page academic report, written by one of the world’s foremost behavioural finance experts, found that the UK has the second highest loss aversion ratio in Europe, and is the 7th most loss-averse country in the global mutual fund industry.
In the report, written by Professor Thorten Hens from the University of Zurich, Polish investors were reported as being the most loss-averse of the 34 countries cited, with South Korea, Thailand and Hong Kong also appearing in the top-five list.
The study, commissioned by Deutsche Asset and Wealth Management Global Financial Institute, found that emotion, and thereby behavioural science, goes some way to explain fund flows in nearly all countries.
In the conclusion to the report, Professor Hens said that investors who are more wary of losses are more likely to increase volatility of fund flows in their native country.
When measuring patience of investors as a ratio across the world, the UK ranked roughly mid-way between Sweden, with the highest level of patience among investors, and Russia at the bottom of the patience spectrum.
However, Professor Hens pointed out that it would be a mistake to assume that loss-averse investors are less patient when markets fall. “The correlation between loss aversion and patience is not statistically significant and is found to be around 20 per cent. This shows that the association between the two variables is not strong; hence they cannot be concluded to be interrelated.”
Investors in Germany, the Netherlands and Switzerland are also prepared to sit on losses for longer before changing their behaviour.
Adviser comment
Huw Jones, director of Wilshire-based Proposito Financial Planning, said: “Clients at the beginning want lots of return without risk but investors have to undergo a period of education which leads to better understanding of how markets work. Advisers have to make sure that clients do not focus on short-term market fluctuations and make silly decisions. When markets are in a rout, money becomes a highly emotional issue so we have to create a framework that allows them to take a step back and look at the long-term.”
