Over the past five years stock markets have soared, approximately doubling, but that was unaccompanied by much public participation.
Historically a rising market attracts the public, anxious to get aboard a winning trend. This time, however, investors are inclined to shun the stock market.
What are the reasons for the virtually unprecedented lack of involvement?
Though changing interest in risk taking are central to booms and busts, many find it difficult to explain the reasons for those patterns. A well-known economist, John Maynard Keynes, referred to “animal spirits” as the motivation factors, but behavioural analysts believe that there are other reasons for people’s actions.
It is obvious that people are risk averse. A Swiss mathematician, Daniel Bernoulli, in the 18th century revealed that given a choice, most would opt for a reward now rather one twice as large later.
Clearly, people differ in their willingness to take risk. That depends in part on one’s psychological makeup and confidence. Those who are wealthy are more likely to take risk as they have resources to sustain them in any event. Too, the more educated have a tendency to be venturesome as again they believe that losses could be recouped. Many of us believe that women are more conservative and unwilling to gamble.
One’s financial history affects the willingness to speculate. If one were successful when young, from that experience there is a greater inclination to assume uncertainly.
History too affects risk taking. The disastrous experience of the 1990s tend to limit the appetite for taking a chance. Anecdotal evidence or personal experience in the previous market downturn certainly limits tolerance for a repeat of those experiences.
Economic turmoil reduces risk tolerance. The collapse of major corporations such as Nortel or Research in Motion or the fiasco at the Bre-X Goldmine, have left a deep scar on many.
Investment choices are affected by age, occupation, family circumstances, individuals’ life experiences, such as personal misfortune, and news stories.
Finally, the sweep of the past recession and lack of faith in governments’ ability to function, to all may curb people’s willingness to indulge in any form of gambling, thus, fortunately, reducing some excesses.