IFEC and PolyU jointly release the results of the Behavioural Science Study on Investor Behaviour on Virtual Assets Call on investors to review their investment behaviour and attitude

• The Investor and Financial Education Council (IFEC) has commissioned The Hong Kong Polytechnic University (PolyU) Department of Applied Social Sciences to understand behavioural factors that affect virtual asset investors’ investment decisions

• The research from PolyU showed investors tend to use “heuristics” (mental shortcuts) to select easily available information for processing and tend to overestimate their investment acumen

• About three-quarters of virtual asset investors surveyed said they invest in virtual assets in pursuit of short-term returns (75%), believe that virtual assets is an investment trend (74%), and worry about missing out on investment opportunities (73%)

• IFEC urges the public to exercise caution and take appropriate measures to safeguard their assets before making investment decisions

With financial technology innovations, the fast-evolving financial services landscape has brought about both opportunities and challenges to investors. Among them, virtual assets have attracted much market attention. In 2022, IFEC commissioned the Department of Applied Social Sciences, The Hong Kong Polytechnic University to conduct the Behavioural Science Study on Investor Behaviour in the Virtual Asset Markets: Heuristics in Virtual Assets Investment Decision-Making to explore the behavioural factors that affect virtual asset investors’ investment decisions. Meanwhile, the IFEC conducted the Retail Investor Study 2023 to further monitor and evaluate the attitude and behaviour of virtual asset investors.

Virtual asset investors tend to rely on “heuristics” (mental shortcuts) to select information and be overconfident in their judgement

The IFEC commissioned the Department of Applied Social Science of PolyU to conduct a behavioural science research on virtual asset investors. Data was collected through a questionnaire from October to November 2022 with 501 respondents aged 18-69 who have traded or held virtual assets in the past 12 months. The study found that investors use habitual mental shortcuts (known as “heuristics” in behavioural economics) including:

• Availability – tendency to rely on information that is readily available, easy to recall and highly familiar

• Anchoring – pay too much attention to past information, such as prices of initial coin offering

• Overconfidence – overestimate personal investment intuition and the ability to achieve high investment returns, etc.

The research team also summarised various mental shortcuts related to virtual assets into five strategies, namely Herding, Secure Obedience, Distrustful Empiricism, Wishful Speculation and Intuitive Confidence, with each type being vulnerable to different cognitive biases.

Virtual assets attracted the attention among the young generation and incidence of investing recorded an upward trend

IFEC Retail Investor Study 2023 was conducted in the form of face-to-face interviews from June to July 2023. About 1,000 interviews were conducted with retail investors aged 18-69 who held or traded a defined list of financial products in the past 12 months. The study showed that most retail investors had invested in stocks (96%) in the past year, followed by investment funds (24%) and bonds (18%).

At the same time, 8% of retail investors surveyed said they had invested in virtual assets and related products in the past year, an upward trend compared to studies conducted earlier (1% in 2019 and 6% in 2021). The young generation demonstrated a stronger interest in virtual assets, 23% of the young working adult surveyed (18-29 years old) had invested in virtual assets and related products in the past year. The proportion was about three times that of the overall retail investor respondents, and had recorded a significant upward trend (3% in 2019 and 12% in 2021).

According to the International Survey of Adult Financial Literacy report released by the Organisation for Economic Co-operation and Development International Network on Financial Education (OECD/INFE) in 2020, Hong Kong ranked first among 26 countries and economies. The study measured overall levels of financial literacy, indicated by combined scores on knowledge, attitude and behaviour. Hong Kong ranked first in terms of financial knowledge, sixth for financial behaviour and fourteenth for financial attitude. This indicated that the Hong Kong public possessed solid financial knowledge, but there is room for improvement in both financial management behaviour and attitude.

The Retail Investor Survey 2023 reflected a similar situation. Awareness of the “Regulation of Virtual Asset Trading Platforms” was 47% among the surveyed retail investors while the level of awareness was much higher among the surveyed virtual asset investors at 96%. In addition, approximately three-quarters of the surveyed virtual asset investors indicated that they invested in virtual assets with the aim to pursue short-term returns (75%), considered virtual assets as an investment trend (74%) and expressed concerns about missing out on investment opportunities (73%). This implied that investors should look into applying the knowledge they acquired to improve and review their investment behaviour and attitude in order to make informed investment decisions.

IFEC General Manager Ms Dora Li said, “The rapid development of financial products and digital technology has brought about more opportunities and challenges for investors. The IFEC would like to thank Professor Eric Chui, Head and Professor of Department of Applied Social Sciences and Co-Director of the Policy Research Centre for Innovation and Technology at the Hong Kong Polytechnic University and his team for the research findings on the behavioural science study of virtual asset investors and their related recommendations. Regardless of the choice of investment products, it is imperative for investors to adhere to three fundamental investment principles. First, investors should maintain a vigilant approach to safeguard their assets. In addition, investors should understand the product characteristics and related risks before investing, in order to align their choices with their financial goals and risk tolerance level. Last but not least, investors should regularly review their investment decisions and outcomes, engage in self-reflection to assess their own behaviour and attitude towards investing.”

Professor Eric Chui, Head of Department of Applied Social Sciences and Co-Director of the Policy Research Centre for Innovation and Technology at PolyU said, “As in other types of investments, the judgement and decision to invest in virtual assets should not rely solely on “mental shortcuts”. In addition to personal intuition, virtual asset investors should think more deliberately and rationally. They should also build up their financial literacy and collect high-quality market information to avoid the irrational investment behaviour and biases, in order to make better informed investment decisions.”

The IFEC is committed to promote and strengthen investor education. The Hong Kong public is encouraged to take full advantage of the tools and resources available on IFEC’s social media platforms and website to develop sound investment and financial behaviour and habits. The IFEC website also features a dedicated page on virtual assets, offering a range of educational resources to help enhance the public’s understanding of the characteristics and risks associated with virtual assets. The IFEC calls on the Hong Kong public to get prepared and embrace the opportunities brought about by the emerging trends of financial digital technology.

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