Institutional Repository | Satya Wacana Christian University: The Empirical Study on the Influence of Investors' Demographic Features and Personality Traits Towards Stock Preference T2 912011036 BAB I

CHAPTER I
INTRODUCTION

This first chapter of this study discusses the
background of the study, the problem formulations,
the purpose of the study, and the significance of the
study.

A. Background of the Study
Swensen in Stråhle (2011) argues that the most
important choice an investor has to face is whether to
invest in value or growth stocks. This means
purchasing growth stocks or value stocks are such
kind of dilemma for investor, whether purchase the
value stocks or the growth stock. Different types of
investors

certainly

choose

different

stocks.

The

decision to choose or purchase certain stocks, in this
study is called as stock preference.
In addition, stock is divided into two broad
categories, value and growth stocks. Some previous
studies has explored on the meaning and the
characteristics of both value and growth stocks such
as Fama and French (1998), Chan and Lakonishok
(2004), Athanassakos (2009), and Stråhle (2011). The
first one was value stocks. Value stocks are stocks

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that the market has underpriced and has potential
for an increase when the market corrected the price.

The second one is growth stocks. Growth stocks are
the stocks that were growing with the potential for
continued growth. Both value and growth stocks have
different characteristics.
Furthermore, the characteristics of value and
growth stocks are determined by the P/E ratio (Price
Earnings Ratio), the P/C ratio (Price to Cash flow
Ratio), MTBV (Market To Book Value), The PEG ratio
(Price Earnings Growth). According to Fama & French
(1998), Oertmann (2000), Athanassakos (2009), and
Stråhle (2011), value stocks have low price to
earnings ratio. At the contrary, growth stocks have
high price to earnings ratio. Larson (2005) and
Stråhle (2011), emphasized that value stocks have
low price to cash flow ratio, while growth stocks have
high price to cash flow ratio. Value stocks have low
market to book value ratio, but growth stocks have
high

market

to

book

value

ratio

according

to

Oertmann (2000) and Chan and Lakonishok (2004).
Finally, Fama & French (1998) and Stråhle (2011)
state that value stocks have low price earnings
growth ratio, while growth stocks have high earning
growth ratio.

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In making the investment decision, including
preferring the stock, the investors are lead by some
aspects. According to Mayfield, Perdue and Wooten
(2008), the aspects to explain the choices investors
make about their investments are demographic
features to explain the investment management
decisions and investors’ personality characteristics to
explain choices that are made concerning investment
decisions. The demographic features used in this
study consist of age, gender, and education. The
previous studies explore the relationship between
demographic

and

investment

decision

such

as

Bhandari & Deaves (2006), Zaidi & Tauni (2012), and
Jamshidinavid, Chavoshani, Amiri (2012).
The other factor, in this case is personality
characteristics to explain choices that are made
concerning investment decisions. There are some
psychological tests to test the investors’ personality
which can be used in finance to find the impact on
investment

decision

such

features, the MBTI and
model.

Some

as

the

BB&K

model

the big five personality

previous

studies

explore

the

relationship between personality characteristics and
behavioral finance, in particular: Sadi et al (2011)
who explore on investors’ personality and perceptual

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biases

effects

on

financial

decisions;

Mayfield,

Perdue, Wooten (2008) who write about investment
management and personality type; and Pompian and

Longo (2004) who create investment programs based
on personality type and gender to produce better
investment outcomes. Additionally, Kahneman and
Tversky (1979) emphasized the prospect theory that
choices

among

risky

prospects

exhibit

several

pervasive effects that are inconsistent with the basic
tenets of utility theory. That is why, it is important to
be

discussed

certain

characteristics

of

persons

towards deciding the stock preference. Investors with
certain characteristics will decide differently if they
are in risky condition.
Here in this study, big-five personality model
employs

to

see

whether

the

personality

characteristics influenced stock preference or not.
According To Mayfield, Perdue, and Wooten (2008),
the personality taxonomy of the Big-five is generally
considered as the most comprehensive and accepted,
particularly for applied research. Big-five personality
model, according to Sinclair (1992) consists of
extraversion vs introversion, confidence vs sensitive,
detail-conscious vs unstructured, tough-minded vs
agreeable, conforming vs creative. While John and

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Srivastava

(1999)

extraversion

or

label
surgency

the

personality

(talkative,

as

assertive,

energetic), agreeableness (good-natured, cooperative,
trustful),

conscientiousness

(orderly,

responsible,

dependable), emotional stability versus neuroticism
(calm, not neurotic, not easily upset), and culture
(intellectual, polished, independent-minded)
The previous studies have not emphasized
deeply

on

the

demographic

and

personality

characteristics towards stock preference. Since there
are some aspects, which might influence the stock
preference, this study analyzed on the factors both
demographic and personality characteristics, which
influenced the stock preference. Moreover, to explore
the personality characteristics, this study employs
the Big Five personality model. There are five
characteristics such as extraversion, agreeableness,
conscientiousness,

neuroticism

and

openness.

However, Mayfield, Perdue, Wooten (2008) prove that
agreeableness had no effect on investment intentions.
Thus, this study employs only four characteristics,
extraversion,

conscientiousness,

openness to experience.

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neuroticism

and

B. Research Questions
Based on the elaboration above, this study
proposed research questions as follow:
a) What are the demographic factors, which may
influence the stock preferences?
b) What are the personality characteristics, which
may influence the stock preferences?
C. Purpose of the Study
The purpose of this study is to conduct an
exploratory study on what factors that influence the
stock preference. This study looks into the influence
of

two

factors,

characteristics

demographic

of

the

and

investors

personality

towards

stock

preferences. Specifically, this study explores what are
demographic factors and personality characteristics,
which influence the investors to choose or purchase
either value stocks or growth stocks.

D. Significance of the Study
The significance of the study:
a) to give additional references about two broad
categories of stocks, value and growth stocks,
including

their

characteristics,

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and

the

characteristics of value investors and growth
investors;
b) to

inform

the

investment

managers

and

financial planner that they should consider the
demographic

factors

characteristics

before

and

personality

recommending

the

investors to purchase the stocks in order to
improve their investment profit.

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