Using Behaviour Finance to understand savings in India

I have been trying to get this database provided by Finance Ministry of India for quite sometime but the link was not working. Now it has been fixed and I am hooked. Basically, it has been derived out of a survey done amongst the individuals employed in the unorganised sector asking numerous questions on their saving and investment behaviour.

The methodology and the questionnaire have been provided as well. The database is huge (almost 34 MB) so people with bandwidth constraint may have a problem. But those that can, should download it for some pretty interesting analysis.

It shows that people prefer fixed income securities for their savings, have little awareness about Mutual Funds, shares and so on. Well, what got me the most interested was this question (abridged verion):

Suppose you have Rs 1000 with you which you want to invest. Here are the three choices given to you:

  1. After one year your Rs. 1000 could become Rs. 2000 or could also become Rs. 500
  2. After one year your Rs. 1000 could become Rs. 1200 or could also become Rs. 800
  3. After one year your Rs. 1000 would become Rs. 1050 and you do not loose anything

What do you think the choice would be? Before that let us rank these choices:

  1. Assuming 50:50 probability of the event happening, the expected value after year 1 is ( 0.5 * 2000 + 0.5 * 500 = Rs 1250)
  2. 0.5 * 1200 + 0.5 * 800 = Rs Rs 1000
  3. Rs 1050

Hence going by classical finance theory the choices in order are 1,3 and 2. But the survey revealed something different choices:                                                            

 

Choice 1 Choice 2 Choice 3
Urban   10.76% 14.40% 74.85%
Rural   9.85%  12.98%  77.17%
All India  10.31% 13.70%  75.99%

These results would definitely make a behavior finance follower smile and classical finance follower frown. Choice 3 wins hands on, despite Choice 1 offering higher expected value. Both at rural and urban the favorite was choice 3. People simply hate any losses on their money.

Well, the result is nothing new and has been explained by nobel laureate Kahnemann and his colleague Tversky (who missed out on the nobel as he had passed away before the nobel). The theory was  called Prospect theory and was developed as back as 1979. The basic idea is simple: given a position of profits humans become risk averse and when there is a position of losses humans turn risk-seeking.

Well, I wanted to point this out as there have been many research papers explaining this behaviour in US and other markets, but I haven’t come across something like this for Indian markets. Overall, the database has some very interesting points which I would try and cover later.

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6 Responses to “Using Behaviour Finance to understand savings in India”

  1. naveen Says:

    hellow sir thats an intersting article.if you have the databese please send it to me sir

  2. P. viswanath Says:

    good morning sir

    the example given here itself shows the behaviour of the investor at proboble risk and return. this emerging discipline helps a lot to policy makers in comming days. Sir i possible could you please send a soft copy of questionnaire , any works,literature or email addressess to contact on behaviour finance concept as i am pursuing ph.d on this line . I will be ever greatful toyou and aknwledge the same in my research work

  3. sunny Says:

    Hey, it would be great if you could send me that database on to my mail id i.e. snnybhatia04@gmail.com.

    Regards,
    Sunny

  4. Meg Says:

    I m doing a research on this topic.If you can mail me the above database it will be very helpful of you .Looking forward to your mail.
    Thank you.

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