Loyola University Chicago

Quinlan School of Business

Research explores behavioral characteristics of Iranian investors

Research explores behavioral characteristics of Iranian investors

"There is a serious need to improve financial literacy among individual investors in Iran," says Abol Jalilvand, PhD, professor of finance.

Investors in Iran are not homogenous, exhibiting different behavior across demographic, psychological, and economic factors, says Abol Jalilvand, PhD, the Ralph Marotta Endowed Chair in Free Enterprise and professor of finance.

And like in other emerging economies worldwide, individual investors in Iran need greater financial literacy to encourage economy-strengthening investments.

These findings come from his most recent research on the behavior of Iranian investors, co-authored with M. Rostami (PhD student from Azad University, Iran) and Jeannette Switzer, PhD. The research examines the underlying behavioral and economic factors influencing Iranian investors’ decisions regarding buying and selling stocks at the Tehran Stock Exchange (TSE).  It further makes policy recommendations to improve the availability of risk capital in the Iranian economy.

For the past 30 years, Jalilvand’s research on key areas in finance such as corporate financing and investment behavior, innovation and financial strategy, risk management, and emerging economies’ performance, has been published in notable peer-reviewed journals including the Journal of Finance, Journal of Banking and Finance, Financial Management, Issues in Accounting Education, and Financial Markets, Institutions and Instruments.

Here, he discusses his current research, its findings, and its implications for industry.

Why research investors’ behavior at the Tehran Stock Exchange?

Two years ago, I was approached unexpectedly by an Iranian finance graduate student from one of the leading universities in Iran, Azad University. He had collected a large questionnaire-based data on investors’ behavior at the Tehran Stock Exchange and was thinking of testing several hypotheses on how their decisions are formed and implemented. But the work was incomplete, needing a considerable level of new empirical analysis, re-positioning, and re-writing in order to turn it into a publishable paper.

Although I was born and raised in Iran, I had not previously investigated Iranian capital markets. Also, as Iran’s overall economic prospects was showing signs of improvement, partly due to the removal of trade and economic barriers recently negotiated with major global economies, I got very interested in working on the project.

The timing of this project coincided with a serious deterioration in my mother’s health. She was 88 years old at the time. As the only child of the family, I ended up traveling frequently to Tehran to care for her medical and emotional needs before she passed away last August.

As I spent more time in Tehran, I began developing a much better and clearer understanding of the challenges and opportunities Iranian academic institutions and public and private sectors were facing. I made connections with different corporate organizations and academic institutions. I gave academic and professional seminars and workshops to universities, corporations, banks, and insurance companies.

What were your findings?

My co-authors and I wanted to find out the influence and the role behavioral and economic factors were playing in forming investors’ decisions in Iran. Specifically, are Iranian investors’ decisions formed following factors prescribed by rational economic theory or is the behavior influenced by psychological and demographic factors such as sentiments, personality, culture, gender, and age? Further, we wanted to know whether such behavioral observations are any different from those observed in other emerging and developed stock markets.

We find investors in Iran are not homogenous and their behavior are significantly affected both by economic and psychologically-related factors. Informed investors’ (fund managers and brokers) behavior appears to be consistent with the general recommendations of economic theory. They view investment knowledge and economic-related variables more importantly than uninformed (individual) investors who are more significantly influenced by behavioral variables such as sentiment and personality.

Uninformed investors’ behavior in Iran corresponds to the general profile of investors in other emerging markets. Informed investors’ behavior does not.  

The research paper is under third revision at the Journal of Business and Economics

Why is your research of interest for industry?

The recent agreement between Iran and major global powers has opened an unprecedented opportunity to encourage new start-ups, increase public and private sector investment, and forge partnerships with global industries. One of the key impediments to such an ambitious economic undertaking is individual investors’ reluctance to participate in capital (equity and bond) markets and, as a result, their overindulgence in short-term bank certificates of deposit and real estate investment. Policymakers are concerned that investors’ limited participation in capital markets will likely cause systemic bank failures, a real estate bubble, or both.

Our results show that investors in Iran are not homogenous. Individual (uninformed) investors view behavioral variables more importantly than cash flow-based measures of performance. In addition, individual investors lack the required financial knowledge and skills to properly assess their investments. An unbalanced reliance on behavioral drivers of investment will likely not lead to stable and growing public participation in the securities markets.

There is a serious need to improve financial literacy among individual investors in Iran. Financial literacy problems are not unique to Iran. It is indeed a major problem in emerging economies worldwide, exacerbated because of the recent financial crisis and markets’ continuing volatility.

From a public policy perspective, more effective regulation of products, sales, and advisory services, coupled with some basic financial education both at pre-and-post-secondary levels could improve the quality of individual investors’ decisions, increase investor confidence and participation in capital markets, provide companies with cheaper access to risk capital, and, ultimately, advance the overall economy in Iran.

How was working with a graduate student?

I enjoyed working with this young enterprising man. I found him to be a very smart, ambitious, and driven individual who cared deeply about high-quality research and his doctoral education. His work was meticulous, and his positive and forward-looking demeanor was contagious. Working with him during the past several years, I can honestly say that he has a bright future ahead in the field of finance.

Our professional relationship has since continued. I am now chairing his doctoral dissertation on the topic of value and growth firms’ behavior in adverse economic environments.

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