Michael Isayev, head of development and operations of the Exness Group, shares his views on the factors influencing the ways in which people around the world approach investing, with culture playing a big role.
Culture is a tremendously important concept for examining the key characteristics that make a nation, or indeed any entity or group, unique. There are numerous differentiators that set one country’s culture apart from another, including language, health and education systems, ethnic make-up, social habits, religious populations and core national values. Each element influences the behaviour, outlook and decisions of the people within that culture, from career and relationships to food, fashion and, notably, their approach to investing.
An investor’s attitude to risk has traditionally been interpreted according to his or her wealth and other economic factors such as job security and inflation. This view assumes that two people from completely different cultures and countries will invest in a similar way should their economic situation be the same. Yet the whole concept of investment starts within communities and individual households, which are built on the foundation of the societal norms that surround them and constitute the fabric of their culture.
Indeed, a study by Mei Wang and Marc Oliver Rieger, professors in behavioural finance, found cultural background does influence investment behaviour, even when variables such as inflation rates and wealth are taken into account.
According to their research, the value premium is higher in countries with more impatient and risk-averse investors, including Russia and Romania. Investors in Anglo-Saxon countries are willing to pay more for equities. And in individualistic nations, such as the United States, there are more “ego-traders” seeking quick gains than in countries deemed to have higher patience, such as Germany and the Nordics, where there are more value traders who prefer to wait for bigger returns.
“It is inevitable that the sum of common experiences people with the same cultural background share will ultimately affect their approach to investment, both due to practical and emotional factors,” says Michael Isayev, head of development and operations at multi-asset broker Exness Group.
“Of course, investment is also a very personal thing and the wealth and status of an individual determines the investment they will make. But societies tend to function collectively and form similar patterns of behaviour, whether we are talking about long-term or short-term investments. Culture will always influence trading, as the inherent characteristics of a nation will always impact behaviour of all kinds, whether societal, personal or financial.
“I don’t think investors from certain nations consistently profit more than those from others, but financial decisions and results vary from country to country depending on numerous factors. For starters, the state of the local economy affects investor sentiment and risk appetite, while culture itself affects trading behaviour. Results also vary according to the frequency of trading and the volume traded, not just whether trades are successful.”
Culture will always influence trading, as the inherent characteristics of a nation will always impact behaviour of all kinds, whether societal, personal or financial
The most historical of all emotional connections between cultures and specific asset classes is the one that exists with gold. According to the World Gold Council, demand for gold trading has moved East over the last decade and this is largely due to the cultural affinity that exists between the precious metal and countries such as India and China.
In India, gold is symbolic of wealth and status, has a leading role in many traditional rituals and is considered one of the safest stores of value. These culturally defined beliefs drive high demand for gold as an asset class, whether it is traded as physical gold or as a CFD (contract for difference) on the precious metal. This cultural affinity to gold is also similar in China, where it is instrumental in the lunar new year and 24-carat jewellery featuring the zodiac sign is frequently given as presents, both for its symbolism and centuries-old value.
Another convincing example of an emotional factor influencing investment decisions is superstition. In the Western world, the superstition surrounding Friday the 13th is so extreme it has been noticed that stock market returns are always lower on that date. Similarly, in East Asian cultures, primarily China, there is great fear surrounding the number four, with investors avoiding all sorts of trades on the fourth day of every month.
The coronavirus pandemic has already played out differently around the world according to individual cultures. The majority of investors globally have responded by increasing their trading activity significantly, not least because most people were quarantined at home for months, with more time on their hands to trade. Delving more deeply into the psychology of trading, however, is likely to expose the geographical factors that have driven certain investors to seek opportunities in the unprecedented volatility caused by the pandemic.
“Quality of life and the ambition to improve it are driving forces behind investment decisions,” says Isayev. “This means investors in poorer countries have a higher risk appetite because their investment decisions are often driven by the need to make more money, not just the desire to make extra money or boost their savings.
“Furthermore, countries in the East are characterised by collectivist societies that rely on family members and close friends to assist them during times of financial need, which makes risk appetite even higher. In the Western world, which is mostly made up of individualistic societies, risk appetite is lower and investment decisions are more conservative on the whole.”
Though Exness Group offers a standard suite of products and services to its global clientele, it also tailors some products by region depending on geographic behaviour, popular asset classes and even religion. Its swap-free trading accounts, for example, are created specifically for traders of the Islamic faith who, according to the Koran, cannot take part in any trading activity that accumulates interest. The accounts allow clients in some of Exness’s most important regions to invest freely without compromising their faith.
Investors don’t necessarily have something to learn from their counterparts in other countries, but understanding cultural differences in trading behaviour can certainly point them to opportunities they haven’t considered before.
“There are different recipes for success depending on someone’s location, income, risk appetite and investment objectives,” Isayev concludes. “Different strategies work for different people and in the same way for different cultures too. Moreover, each country’s GDP dictates a different economic climate, which inevitably acts as the backdrop to any financial decision made by its citizens.”
For more information please visit www.exness.uk