Does Global Shapes of Utility Functions Matter for Investments Decisions?

Ranganathan, Kavitha (2018) Does Global Shapes of Utility Functions Matter for Investments Decisions? Bulletin of Economic Research.

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Abstract

The study investigates relation between global shapes of utility functions and investor preferences towards particular asset classes for investment decisions. Global shapes that emerge are fully concave, fully convex, Reverse-S and S-shaped utility functions, using the certainty equivalence method for eliciting risk preferences. Investor clusters show existence of two types of investors, preference towards financial assets (bank deposits, insurance, pension and provident fund, shares and mutual funds) vs traditional assets (chit funds, gold and precious metals, real estate, postal savings, and government bonds). Investors with reverse-S and S-shaped utility functions prefer investment in financial assets, while investors with fully concave and fully convex utility functions prefer traditional assets. Prior studies suggest reverse-S and S-shaped category of investors perceive risk in terms of gains and losses, and financial assets with ready price quotes facilitate such buying and selling. In contrast, fully concave and fully convex utility functions prefer investment in traditional assets that requires long term horizon and stable risk preferences. Among demographics, males with reverse-S shaped utility function are more likely to invest in financial assets, and increase in dependents reduces the possibility to invest in financial assets.

Item Type:	Article
Uncontrolled Keywords:	Decision-Making Under Risk; Individual Investors; Investment Assets; Utility functions
Subjects:	Finance
Divisions:	Finance and Strategy
Depositing User:	Mr Ramesh Kamath
Date Deposited:	08 Sep 2018 10:34
Last Modified:	14 Feb 2019 09:28
URI:	http://tapmi.informaticsglobal.com/id/eprint/10

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