Dr Annie Zhang at her graduation this week.

PhD grad hopes thesis will improve financial literacy

 

Dr Annie Zhang, who graduated with her PhD from Massey University this week, hopes her thesis will help improve the financial literacy of Kiwi families.

She chose to research the factors that influence investor behaviour because it was “an area where I could make a real contribution to the wellbeing of everyday New Zealanders”, she says.

It’s long been assumed that an investor’s own personal characteristics and the financial advice they receive shapes their decision making. But Dr Zhang has found that the strongest influence of all comes from those you live with.

After being given access to databases containing over 600,000 investor accounts from four large KiwiSaver providers and one bank, Dr Zhang was able to analyse the factors that influence individual investor behaviour.

One of her key findings was the extent to which members of the same household invest in the same way.

“I found that almost two-thirds of people hold the exact same investment fund – and therefore identical asset allocation – as the people they live with,” Dr Zhang says. “That means that people in the same household are at least two-and-a-half times more likely to hold the same investment fund.”

Dr Zhang says she was initially surprised by the extent of the influence that household members have on each other.

“The family and household are so fundamental that it is easy to overlook,” she says. “I’m sure there are many cases of what you could consider the ultimate peer effect – where one member of the household makes investment decisions for others.”

The influence of family on individual investment choices has both pros and cons, she says.

“On the one hand, it is good to know that the family and basic human relationships matter and play a significant role in the increasingly complex financial system. On the other hand, however, our reliance on family is problematic because of a real need for considered and educated responses to inform our decision making.”

Dr Zhang also found evidence of a strong family influence in the switching behaviour of investors, with investors much more likely to switch funds if someone in their household has switched.

“On average, investors only switch funds one per cent of the time. But if a household member switches, then that likelihood increases to 10 per cent for a six-month horizon.”

Dr Zhang says she she hopes her research sparks an interest in empowering households to improve their financial decision making.

“This is an idea that struck me as an exciting possibility for how we approach financial literacy in New Zealand. The evidence seems to suggest that what we need is a mix of formal and informal channels.

“We definitely need what financial institutions are already providing, but there is also scope for new modes of delivering financial literacy that target the spaces between people and work through whānau, friends, co-workers and our communities.

“After all, what a better place is there to start exploring financial behaviour than with those people who are already closely attached to us?”

Dr Zhang’s thesis ‘Essays on Household Behaviour and Individual Investor Behaviour’ studied a range of factors that influence investor behaviour, including whether investors use past returns to choose funds, whether financial advice shapes asset allocation, and the relative importance of peer effects and personal characteristics on fund choice and asset allocation.

Key findings include:

  • Female, younger and wealthier investors are more likely to choose funds that have achieved higher past returns.
  • Female, older and wealthier investors are more likely to seek out financial advice.
  • Investors who receive financial advice are more likely to invest in riskier assets.
  • Over the five-year time frame of the study, seeking financial advice produced only a marginal difference on investment returns.
  • People in the same household are at least 2.5 times more likely to hold the same investment fund.
  • Co-workers are at least 1.4 times more likely to hold the same investment fund as others in their workplace.
  • On average, investors only switch one per cent of the time; but if a household member switches, then that likelihood increases to 10 per cent for a six-month horizon.

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