4.3 Discussion of Findings
From the study so far, it is evident that the investment
decision-making process is influenced by financial regulations, risk management
and value creation combined with some other socio-psychological factors as
shown in the figure below.
Figure 9: Factors Influencing Investment
Decision-Making
From the assumptions of the CAPM and MPT theories, this study
revealed that investors are risks-averse in their behaviour in making
investment decisions although these investors can be risks tolerant sometimes
thereby portraying the fact investors still have different perceptions in their
attitude towards risk. This is because personal qualities have a lot to do when
it comes to determining the likelihood of losses and exposure to loss.
Regarding the impact of other factors influencing the
investment decision-making process, this study also revealed that investors are
influenced by socio-psychological factors which include a number of cognitive
illusions grouped into heuristic factors and the prospect
theory (as explained in chapter two). Within the content of this study, it
was revealed that all the factors are important in influencing the investment
decision-making process. This study also revealed that the near collapse of
some big financial institutions and massive public rescue packages proved that
the continuing operation of the banking system is impossible without the state
guarantee especially in times of crisis.
In chapter two of this study, we were able to bring out the
different risks types existing within the financial sector and how these risks
can be managed and why financial institutions need to take on such risks in the
first place. It was also realized that there exists a relationship between
financial regulations, risk management and value creation and how they all have
a common goal which is being geared towards making investment decisions for the
institution.
This study also revealed that the global crisis to a large
extent is as a result of investors and financial institutions' attitude towards
risk control. From our understanding of behavioural finance, it is evident that
behavioural finance provides very convincing explanations regarding the causes
of the global financial crisis. Therefore most of the causes of the present
financial crisis can be identified with factors within the content of the study
of behavioural
finance. As such, the biggest proof of the strong influence of
behavioural factors/finance to the amplification of the crisis was the collapse
of Lehman Brother.
The root cause of the 2007-2009 global financial crises was
the liquidity shortfall in the US banking system caused by the overvaluation of
certain assets which unfortunately led to the collapse of some very large
financial institutions. As a result of this, the confidence that used to reign
in financial institutions began to shake thereby resulting to a reduction in
the value of shares as well as a fall in share prices for large, small and
investment banks between July 2007 and March 2009. This made it possible for
the interbank lending services to be disrupted because banks stopped trusting
other banks and the trust in the whole financial system started failing, (Shah,
2009). According to Taylor, 2009, the 2007-09 global financial crises became
severe as a result of the sudden and an unprecedented surge in the interbank
rates. No doubt he argues that the surge in these interbank rates was as a
result of counterparty risk hence banks became reluctant to lending to other
banks because of fear of the perception that the risk of default on loans had
increased implying an increase in the market price for such risks. This strange
behaviour of banks caused other banks to suffer from the combination of
liquidity, balance sheet pressures as well as becoming concern about the
solvency of their counterparties, and hence became reluctant to provide other
banks with funding as well. These banks were left with no other option than to
get up and dance as the music was playing because it became obvious that if
bank A is being refused a loan, it will definitely refuse to loan out to B and
C likewise B and C. Therefore, the inter-bank loans' market either became very
expensive (high interest rates) or dried up completely. This unwillingness of
banks to loan to each other implied that the credit markets were gripped by an
irrational panic and this scared away potential lenders because they assumed
they will never get back their money.
It is widely accepted and acknowledged that excessive liquidity
and overconfidence was one
of the main causes of the massive credit
expansion which unfortunately resulted to the present
financial crisis. One of the reasons for the supposed credit
expansion was that the market actors were suffered from short memory and became
increasingly irrational and overconfidence that liquid markets could
continue indefinitely, but unfortunately it did not turn out as anticipated
because this overconfidence in the markets was further refuelled by
financial innovations such as the development of funding calls on behalf of the
banks, keeping of securities as collaterals and creation of CDOs. As a result
of this down turn in the markets and because of overconfidence, (the
concept of overconfidence is explained in chapter two of this study as the
belief in one's skills and abilities) in early 2007, mortgages were extended to
borrowers with even dubious credit histories. Because the investors were
overconfident with what they were doing, mortgages were given out to people
with dubious credit histories which eventually let to the outbreak of the
crisis. This of course had to unfortunately spread over to other parts in the
western world whereby other mortgage borrowers became scared of the fact that
the rising housing prices would last forever and had to rush to jump onto the
property wagon because they did not want to be left behind.
Another major cause of the 2007-09 crisis was the lost of
confidence in the credit rating agencies. This is because, before the outbreak
of the crisis, the credit rating agencies used to be looked upon as the
backbone behind any effective operation within credit markets and any
activities associated with them. Investors used to use credit rating done by
these credit rating agencies in valuing and pricing credit products. When it
became obvious that some AAA rated assets by these credit rating agencies were
to face large write-downs, investors began losing faith in these credit rating
agencies. Consequently, since these investors were no longer willing to rely on
the ratings done by these credit rating agencies, they were unable to perform
their credit analyses, therefore they had to withdraw. The act of these
investors withdrawing implied that the recycling of bank assets to fund
business expansion became almost
impossible thereby resulting in a serious liquidity crunch since
banks also became reluctant to loan out money to other banks.
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