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Patience versus loss aversion – a country-specific phenomenon



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The time at which investors buy or sell fund units can be traced accurately to investor psychology, according to a paper commissioned by the Deutsche Asset & Wealth Management Global Financial Institute.

 
The paper, written by Professor Thorsten Hens (pictured) from the University of Zurich who is regarded as one of the world’s leading scientists in the field of behavioural finance, compares and analyses mutual fund inflows and outflows in more than 35 countries.
 
Previously it was only known that development of assets under management varied widely according to country and precise data was available only for the US.
 
Hens concludes that only in a few countries, for example Luxembourg and Ireland, do peculiarities such as fund-favourable regulations actually play a role in mutual fund flows. In all other countries, fund flows can be traced to aspects of behavioural finance.
 
The paper finds one of the best-known behavioural finance patterns is loss aversion. Price losses of ten per cent, lead to much stronger emotions than profits of ten per cent. Inflows and outflows from investment funds fluctuate much more in countries where investors demonstrate a tendency to be wary of losses. Countries with such a distinct loss aversion are mainly in Asia, such as in Hong Kong, Thailand or South Korea.
 
German investors, by contrast, follow a quite different behavioural pattern described in the paper as “Patience”. This means that investors in Germany, and also in Sweden, Netherlands and Switzerland, will wait much longer before altering their behaviour.
In all countries analysed, the financial crisis clearly had an impact on investor psychology after 2007. Since then, investors have purchased fewer units in response to price increases in their home markets.

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