Effect of Psychological Factor on the Individual Investor’s Risk Tolerance at Listed Service and Manufacturing Companies in Tanzania

Abstract

one of the important factors in financial and investment decision is risk. The main objective of this study is to examine the effect of psychological factor on the individual investor’s risk tolerance at financial and manufacturing companies in Tanzania. The study was use Co-operative Rural Development Bank (CRDB) and Tanzania Cigarette Company (TCC) as study area of the research. The study used a sample of 80 respondents from the selected companies. In addition, the study used secondary data which were obtained from different literatures such as reports, published and unpublished papers and other related documents. Descriptive statistics, factor analysis, and linear regression were used to check both association and influence of psychological factors on individual investors’ risk tolerance. The findings show that overconfidence, loss aversion and mental accounting were positive and significantly related to the risk tolerance of individual investors. This study recommends that stakeholders should take into consideration key factors such as gender and income, loss aversion, mental accounting and overconfidence in investing in companies. The study further recommends that, the Government and Regulatory Authority should make use of the findings obtained from this study when formulating and implementing various policies related to investment decision.