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Study of Factors Influencing Investment Decision of Households in

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 Study of Factors Influencing Investment Decision of Households in
Oman

Radha Krishan Sharma*, Goyal, Rahul** Sharma, Anil***

*Department of International Business Administration, Rustaq College of Applied Sciences,

Ministry of Higher Education, Sultanate of Oman, Email: rk_691@yahoo.co.in

** …………..

***Faculty Mamber, AIHM, Haldwani, Nainital, UA, India,

Abstract

This paper is outcome of a pilot study conducted among households in Oman. Key
objective of the study was to identify and analyze preferred investment avenues and
different factors influencing investment decision of Omani households. This study is first
of its kind in Oman, as so far no academic research have been conducted to understand
investment behavior of Omani households. Study outcomes are based on analysis of
primary data collected through questionnaire. The finding of study confirms results of
some previous studies. This study found that 25 key factors influence choice of
investment avenue and investment decision. There is not significant relation between
choice of investment avenues and the educational, occupational level and work
experience. The first choice as Investment Avenue of Omani Households is ‘Real Estate’
and last choice is ‘Company Fixed Deposits’. While the ‘Market Trend’ and ‘Rumors’
are the most influencing and ‘Government Policies’ and ‘Dependent Behavior’ are least
influencing, rational and irrational factors respectively in investment decision making in
Oman.

Key Words: Investment behavior, Investment Avenue, Influencing factors, Households,

Rational and Irrational Factors, Rumors, Trading pressure, Self-image of investment
avenues, Mental accounting, Overconfidence and Dependents behavior.

Introduction
A countries economic growth largely depends on investment. According to Lease &
Schlarbaum (1974), “any initial increase in investment will lead to increases in income
through the investment multiplier”. Hence for structured development of societies, study
of investment process has always been of the prime interest to financial and banking,
economics, administration and other disciplines of studies. For economic growth
developing countries needs to promote intended saving habits among people of the
country. These savings, than must be directed to rationally planned profitable investments
and add value to ‘individual satisfaction’ and ‘national economic growth’.

Investment has different meaning in economics and finance. In economics, investment

means saving and dealing with consumption of money. Whereas in finance, investment
means placement of money into something with the expectation of future gains over a
longer term. All investments include risk. Investment decision may or may not be taken
with research and analysis, but most forms of investment included one or other types of
risk. Investment in gold/silver, real estate, corporate bonds, equities, life insurance and
even fixed interest securities are subject to risk such as inflation risk, exchange risk,
business risk, liquidity risk etc.

Nowadays large numbers of investment avenues are available to individual investors

worldwide. Some of these avenues are marketable and liquid while others are not; some
involve a high level of risk and some are less risky. Investment decision-making is a
complex process consisting of serious actions taken by an investor. This process includes
the anticipation of the future and analyzing several factors to achieve specific objectives
(Chandra, 2008). According to Malhorta (2009) investment is a savings game, hence the
investment decision should not be influenced by the investor`s emotions and psychology.
Any investor, as a human being, wants to make an investment decision where good return
and less degree of risk can be obtained. Hence, there are two essential factors that
influence the investment decision of any investor: return and risk (Glogger, 2008).
Nowadays the investment environment is dynamic and changing rapidly; i.e. there are
lots of opportunities for investment along with a lot of information available. In addition,
any investment involves commitment of assets, exposing these assets to risk and this may
generate regret aversion (Sharma et. al., 2011). The investor therefore has to be very
selective while deciding which market or stock to invest in. However, despite the depth in
experience yet investors are affected by psychological biases (Rumors, Trading pressure,
Self-image of investment avenues, Mental accounting, Overconfidence, Dependents
behavior etc.) thus leading at times emotional and irrational decision (Chandra, 2008).
This irrational behavior sometimes results in bad investment and regret aversion (Sharma,
Al-Kadimi and Sharma, 2011). Omani investors are also not exception to this.

Oman is a developing economy; hence this is not possible to ignore importance of

household’s intended savings and rational investment in economic activities. Winsen
(1976), concluded that there is a positive correlation between investment and the
economy, the increase of investment will positively affect the development of the
economy and vice versa. Thus, defining the avenues of investment, which influences
economy, largely depends on investor’s decision. Hence, it is must to understand
different behavioral factors influencing investment decisions of individual investors and
also to check impact of these factors on performance of their investment. This study is a
pilot project, intended to identify and analyze preferred investment avenues and different
factors influencing investment decision of Omani households. In this study an attempt
has been made to develop basic understanding of common investor behaviors in Oman
and identify the biases that may make losses for them. This study is confined to 60
respondents from one single region of Oman, hence may not be generalize. This study
opens doors for further detailed studies in future.

Literature Review:

Brennan and Cao (1997) found that investment is the obligation of capital to buy
financial instruments or other assets in order to earn profitable returns in the form of
interest, income, or predicting of the value of that instrument. Investment is related to the
form of saving or deferring consumption. The investment included the choice by an
individual after some analysis and research for facts to lend money in real estate,
commodity, equity, bond or shares, financial derivatives, antiques or the foreign asset that
has a specific level of risk and give the possibility of generating returns over a specific
period of time.
Keynes (1936) observed that saving and investment decisions taken by different investors
(decision makers) are not a reason to conclude that subsequent savings should equal
subsequent investment. That lead to develop the investment theory which makes
investment a linear proportion of changes in output while disregarding the role of factor
costs.

In 1970s, the first appeared the theory of the individual investors. Lease, Lewellen, and
Schlarbaum (1974) provided information about the demographic characteristics, the
patterns of investment strategy, information sources for investment, asset property,
market attitudes and expectation , of the individual investor behavior. They classified
investors in two types, the first who seeks capital appreciation and the other who seeks
dividends. The first type of investors concerned with capital appreciation, so they are
willing to sacrifice current dividends for future price gains. While second type of
investors were old edged people and women their key focus was avoiding risk rather than
large increase in the value of their investment.
Traditional finance theory is based on two assumptions. Firstly, people always think
rationally and act according to the logic when buying and selling stocks; and secondly
they are unbiased in their predictions about future returns of the stock. According to
Chandra and Kumar (2011), rationality in the process of investment decision-making
refers to two main factors “the exhaustive and objective treatment of available and
potential information”. In addition, traditional finance assumes that people are “risk
averse” meaning that they don’t take risk at all but sometimes they tend to in case the
returns are sufficient (Nofsinger, 2008).
Winsen (1976) found Efficient Market Hypothesis explain that stock market prices must
reflect all information available for public, so achieving a natural return regularly will be
near impossible using such information. Winsen argued that investors in some firms
misunderstand or misuse certain data items available publicly which results in their
behavior not being an appropriate function of the flow of future information in the stock
market.
Forde, Gallagher, Lai and Walter (2010), In rational decision-making models, decision
makers analyze a number of possible alternatives before selecting the investment asset.
Their analysis is based on a combination of fundamental and technical analysis and
sometimes the assessment of macroeconomic environment is involved. Sometimes
inexperienced investors, who don't have knowledge in analysis, resort to brokers who
provide them with a clear course of action on whether to buy or sell a stock. Around 49%
of investors in Muscat Securities Market rely on their brokers' recommendations when
making an investment decision (Sharma, Al-Kadimi and Sharma, 2011).

There are two essential factors that influence the investment decision of any investor:
return and risk (Glogger, 2008). Baker, Hargrove, and Haslem (1974) expressed that risk
and total return have positive relationship but less than the relationship between risk and
capital expectation. The relationship is reduced by the negative risk-dividend
relationship. Investors with lower risk look for high dividends while investors with higher
risk look for higher capital appreciation. Malkiel (2003) EMH assumes that stock price
fully reflects all available and announced information. Hence, every investor must take
careful account of all available information before making a decision in an investment.
Epstein (1994) argues that there is a strong demand for annual report including
information about product quality and safety and the environmental activities of the
corporation.
Warren, Stevens, and McConkey (1990), realized that although the demographics are
used commonly to segment the market for both financial and economic services but
lifestyle attribute assist in defining individual investor’s financial needs in more
precisely. Riley and Chow (1992) found that whenever the age is increasing, the avoiding
of risk decreases.
Sultana (2010) realized that individual investors’ decisions are not always based on the
cold calculations, sometimes investors’ decisions are derived by their irrational emotions.
Nagy and Obenberger (1994) studied factors influences individual investors and found
the criteria of wealth maximization which are important to the investors. The results of
study by Hoffmann, Eije, and Jager (2006) about the needs and conformity behavior of
investors show that in addition to satisfying the financial needs of investors, it should also
exert maximization efforts to satisfy socially oriented needs. The researcher found that
individual investors give importance to financial gains. Thus, the study followed benefit
approach "extended" along with the support of behavioral finance, which stipulates that
offers all the benefits of investing utilitarian and expressive. For that reason, the investors
show different types of needs besides the financial sides of investments.
Al-Tamimi (2006) studied the factors of the company returns expected, holdings of
government, securities marketing, get rich quick, and the establishment of financial
markets. The least influencing factor were provided were: the neutral of information,
accounting information, recommendation advocate, personal and financial needs and self-
image about the company.
The result of Sevil, Sen, and Yalama (2007) research show that the decision processes of
small investors trading on the stock exchange are expressly that investors are not
completely rational as perceived by traditional finance theories.

Methodology:

Study is outcome of Secondary data available in different print and online sources but
primarily based on primary data. Primary data has been collected through questionnaire.
Total 100 questionnaires were distributed among 50 male and 50 female households.
Total 60 respondents (44 male and 16 female) provided their responses. Respondents
have been selected using convenience random sampling. Data so collected has been
analyzed using different analytical tools like percentage, frequencies, charts, likert-scale
etc, appropriate for this type of study. To make analysis technically sound and maintain
accuracy of results SPSS and Microsoft Excel has been used. To maintain quality of
research, the questionnaire with poor quality has been removed such as including too
many missing values and or selection of more options than required.

Analysis and Results

Results are based on following analysis of data-

Table 1. Demographic Variables (Total 60 Respondents)

Valid Cumulatve
Valid Frequency Percent Percent Percent
Distribution by Male 44 73.3 73.3 73.3
Gender
Female 16 26.7 26.7 100
Total 60 100 100
Age 18-25 9 15 15 15
26-35 17 28.3 28.3 43.3
36-45 22 36.7 36.7 80
46-55 8 13.3 13.3 93.3
>55 4 6.7 6.7 100
Total 60 100 100
Genera diploma
Education level and lower 25 41.7 41.7 41.7
Undergraduate 8 13.3 13.3 55
Bachelor 22 36.7 36.7 91.7
Master 5 8.3 8.3 100
Total 60 100 100
Years of working
Experience Under 5 years 19 31.7 31.7 31.7
5-10 years 23 38.3 38.3 70
Over 10 years 18 30 30 100
Total 60 100 100
Level of income Under 200 6 10 10 10
200-500 20 33.3 33.3 43.3
500-1000 28 46.7 46.7 90
More than 1000 6 10 10 100
Total 60 100 100

Table 1 above provides the summary of demographic profile of the respondents

understudy. This helps to develop an idea of demographic characteristics of the individual
investors under study. Majority of investors (73%) are male and as few as 27% are female.
Most of the investors fall in age group of 26-35 years (28%) and 36-45 years (37%). Whereas
very few investors fall between 18-25 (15%), 46-55 (13%) and above 55 (13%) years. This
indicates that middle age people are more active investors in Oman. There is not
significant relation between investment avenues and gender or age groups. As far as
education of respondents is concerned all of them are literate but 42% are either have
diploma or lower certificate, but 13% are under their graduation and 37% are bachelor.
Also 8% of respondents have master’s degree. Hence majority of investors though not
professionally qualified but are well educated. Majority of investors (68%) understudy
have more than 5 years of work experience. Hence, the investment is not limited to a
specific level of education. There is not significant relation between choice of investment
avenues and the educational, occupational level and work experience.

As high as 33% and 47% of respondents fall between middle income group i.e. Rial
Omani 200-500 and 501-1000 per month (Rial Omani 2400-6000 and 6001-12000 per
year) respectively. Respondents understudy with monthly income more than Rial Omani
1000 (12000 per year) and less than Rial Omani 200 (2400 per year) both are as few as
10% each. This suggests most of the households fall in middle income group. Comparing
to higher income group respondents medium income group respondents given more
preference to invest in real estate, insurance, bank fixed deposits. Medium income groups
investors prefer to take less risk than higher income group.

Investment avenues
Analysis of data relating to choice has been summarized below in Figure 1.

Figure 1. The Investment Avenues

Real Estate
Others
Equity
Bank Fixed Deposit
Life Insurance
Gold/Sliver
Mutual Fund
Corporate Debenture
Company Fixed Deposit

400 350 300 250 200 150 100 50 0

Figure 1 revealed that among Omani households most preferred investment avenue is real
estate, followed by Other, Equity, Bank Fixed Deposit, Life Insurance, Gold and Silver,
Mutual Fund, Corporate Debenture and Company Fixed Deposit, respectively. Important
observation worth noting here is, that majority of respondents mentioned ‘Vehicles’ as
Investment Avenue under ‘Others ’category. This indicates their ignorance about concept
of investment.
Factors influencing investment decision

The factors influencing investment decisions are divided in two categories, rational

factors and irrational factors. Findings about rational factors influencing investment

decisions are compiled and presented in ‘Figure 2’ and about irrational factors

influencing investment decisions in ‘Figure 3”.

Figure 2. The rational factors influencing investment decisions

 Market trends
Income level of investor
The profitability of investment
Place of investment
Past experience
Capital amount of investment.
Risk tolerance
Advocate recommendations
Information about investment avenues
Return Needs
Accounting information
Investment needs
Economic condition
Investment Horizon
Tax Exposure
Industry growth
The competitive investor performance
Government policies
250 200 150 100 50 0

‘Figure 2’ suggests’, that most influencing rational factor on investment decision of

Omani households is Market Trends, followed by Income level of Investors, Profitability

of Investment, Place of Investment, Past experience, Capital Amount of Investment, Risk

Tolerance, Advocate Recommendations, Information about investment avenues, Return

Needs, Accounting Informations, Investment needs, Economic conditions, Investment

horizon, Tex exposure, Industry growth, Competitive investor performance and least

influencing is Government policies.

Figure 3. The irrational factors influencing investment decisions

 Rumors

Trading pressure

Self-image of investment avenues

Mental accounting

Overconfidence

Dependents behavior

250 200 150 100 50 0

Whereas ‘Figure 3’ revels that the irrational factors influencing investment decision of

Households in Oman according to the degree of influencing are Rumors, Trading

pressure, Self-image of investment avenues, Mental accounting, Overconfidence and

Dependents behavior respectively.

Conclusion:

For this study data collected from households through questionnaire have been analyzed
using appropriate analytical tools. A wide range of literature on behavioral finance has
been reviewed. The choice of investment avenue and investment decision is influenced
by different factors. This study found that 25 key factors influence choice of investment
avenue and investment decision. Middle age people are more active investors in Oman.
Majority of respondents though not professionally qualified but are well educated. The
investment is not limited to a specific level of education. There is not significant relation
between choice of investment avenues and the educational, occupational level and work
experience. Comparing to higher income group respondents medium income group
respondents given more preference to invest in real estate, insurance, bank fixed deposits.
Medium income groups investors prefer to take less risk than higher income group. From
above analysis this is evident that the first choice as Investment Avenue of Omani
Households is ‘Real Estate’ and last choice is ‘Company Fixed Deposits’. However most
of the households consider ‘Vehicles’ as an investment avenue, this indicates their
ignorance about concept of investment. While the ‘Market Trend’ and ‘Rumors’ are the
most influencing and ‘Government Policies’ and ‘Dependent Behavior’ are least
influencing, rational and irrational factors respectively in investment decision making
factors in Oman.

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Appendix: Factor influencing investment decision

1. Rational factors

143 Government policies

155 The competitive investor performance
161 Industry growth
167 Tax Exposure
174 Investment Horizon
176 Economic condition
187 Investment needs
188 Accounting information
194 Return Needs
197 Information about investment avenues
202 Advocate recommendations
208 Risk tolerance
219 Capital amount of investment.
223 Past experience
225 Place of investment
226 The profitability of investment
226 Income level of investor
 234 Market trends

2. Irrational factors

143 Dependents behavior

158 Overconfidence
168 Mental accounting
175 Self-image of investment avenues
198 Trading pressure
203 Rumors

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