What 23,000 South African investors can teach us about behavioural bias

From dumping stock, to panic-buying toilet paper, the Covid-19 crisis has provided the perfect example of how fear and greed tend to influence us, and challenge the logic of our decision-making process.

While most of us understand the science behind long term investments, it seems that in the face of a crisis, logic goes out the window and we do things that can negatively impact our journey to financial success.

But, said Paul Nixon – Momentum’s head of technical marketing and behavioural finance – recent research shows that it’s not all bad news.

Referring to a recent whitepaper “Understanding the great forces that rule the world: A study on South African investor behaviour”, Nixon said that there are steps we can take to keep control of our financial success by over-riding the detrimental auto-pilot in our brains when volatility strikes.

Avoid the switch itch, mind the behaviour gap

“Volatility refers to those times when the market is very uncertain and the value of investments tend to go up and down,” said Nixon. “This can happen when a company scandal breaks, Elon Musk tweets something vague, or – on a bigger scale – when a global pandemic hits.

“During the panic that follows, it’s human nature to unknowingly give way to cognitive biases, or bad mental habits. In the investment world this usually causes people to switch their investment funds – some change to safer, lower-risk investment funds while other people may take a gamble and switch to higher risk investments with the allure of greater reward,” said Nixon.

The team at Momentum have called this urge to change investment funds “the switch itch”.

Their research shows that it results in an actual cost over time in the form of lower investment returns – knows as a “behaviour gap”, meaning that we actually lose money when we make hasty switching decisions.

The work forms part of a series of studies and research making up Momentum’s Science of Success initiative – a platform where data and insights are brought to life to demonstrate how certain behaviours can accelerate or decelerate our journey to success.

By studying how our emotions impact our financial success, this latest research forms a crucial building block to understanding the science of success.

Nixon, along with professor Evan Gilbert from the University of Stellenbosch’s School of Business and Dirk Louw, an actuarial analyst at Transaction Capital Recoveries, studied the behaviour of 23,000 local investors over time.

The result was a detailed understanding of the motivation behind our switching decisions and how this improves or derails our financial success.

The team then used this to develop a set of investor archetypes, explains Nixon. “The archetypes allow us to see which type of investor we are likely to be so that we can identify behavioural triggers and try to quell them before the switch itch kicks in,” said Nixon.


Know your type – Which behaviour investment archetypes are you?


The Avoider

  • You like to sit on the side-lines instead of participating in markets.
  • The verdict: Your behavioural tax will be low because you aren’t switching often, but you could be missing out on returns that you need because you don’t like risk.

The Market Timer

  • You are very active in terms of watching your fund performance.
  • When things are going well – you want to be there. But when they don’t, you want to get out.
  • The verdict: You switch a lot and this results in a high behaviour tax – which can damage your savings over time.

The Assertive Investor

  • You like to take risks, stay ahead of the trends and prefer niche, exciting investments.
  • The verdict: To satisfy your craving for risk, you tend to switch a lot as new trends emerge. This results in a high behaviour tax – which can eat into your financial success.

The Anxious Investor

  • You don’t like risk, become scared when markets show any sign of turbulence and switch out.
  • The verdict: As your fears drive you to switch, you are often in the wrong place at the wrong time and tend to have a high behavioural tax which will erode your investment returns.

The Contrarian

  • You don’t like to be part of the herd. When others are buying, you sell. When people are selling, you buy.
  • The verdict: You are the only archetype to benefit from switching. But, you are in the minority, and things can change – so you need to ensure that you remain focused on the outcome instead of what others are doing.

According to Nixon, understanding which archetype you relate to will help you to be mindful of your behavioural tendencies so that you can seek the right advice before making snap decisions that could cost you. “In addition to this, following these tried and tested tips will benefit us all, no matter our personality type,” said Nixon.

  1. Get professional financial advice, set goals and develop a plan to achieve these;
  2. Have a long-term mindset and don’t worry about timing. Get your wealth to work for you as soon as possible;
  3. Diversify and spread your risk;
  4. Have a cash windfall for a rainy day to ensure that you are not forced to sell long-term investments;
  5. Review your plan often – especially when big life changes happen – and make the necessary tweaks.

Head of marketing at Momentum, Charlotte Nsubuga-Mukasa said that professional financial advice is vital for South Africans to gain control of their financial success journey.

“The Science of Success work demonstrates the importance of research-backed financial advice in helping us to stay the course in terms of our journey to success. By getting fresh financial perspectives from a trained professional, you can avoid making emotion-driven decisions, and remain on track to achieving your financial success.”


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What 23,000 South African investors can teach us about behavioural bias