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Relationship Between The Information Asymmetry And Risk Perception



Investing is to allocate money or capital into stocks, bonds, unit trust, savings for the purpose of obtaining an income or profit. Investment comes together with the risk of loss of the principal sum. The investment that has not been analyzed in detail can be risky because the possibility of losing money is not within the investor’s control. In finance, investment is the commitment of funds by buying securities or other paper financial assets in the money market or capital markets.

An investor is a party that makes an investment with the objective of making a profit. Investors can be classified according to their investment styles. For this, an important investor psychology trait is risk perception. Behavioral finance use social, cognitive and emotional factors in the understanding of decisions of investors and their effects on market prices and returns. Behavioral finance highlights inefficiencies such as under- or over-reactions to information as causes of market trends and in extreme cases of bubbles and clashes. Such reactions have been attributed to limited investor attention, overconfidence and gambler fallacies.

Different people invest with different strategies such as getting “inside information”, tips from friends and encouragement from investment bankers and also through past experiences. Changes in attitude to take risk and changes in the performance in investment environment provide opportunities for investors to become involved in investing.

Potential investors must make investment decisions or taking risks in investments. Decision making processes included reasoning patterns of investors, emotional processes and the degree emotions play to influence the process. Investment involved taking risk or uncertainty that exist as to what eventual outcome will be. Risk perception maybe conceived as primarily a cognitive activity, involving the accurate appraisal of external and internal states. It is an idiosyncratic process that adds meaning to an objective situation and is itself shaped by knowledge, emotion, and experience (Roszkowski and Davey, 2010). However, investors are limited by their values, limited information and knowledge.

Factors influence investors’ choices are information asymmetry, overconfidence and financial knowledge. Changes with age, gender, and education level will also determine investors’ risk perception.


Investor behavior may respond differently under different situation and locations. Most the reports regarding investors’ behaviors are from market analysis or deducing from information relating to stock market index. Recently, there have been interests in conducting field studies on investors’ behavior. Nik and Mazurainy (2009) reported that investors are partially rational in making their investment decisions in Malaysia. Wang, Shi, and Fan (2006) found that most of the investors lack knowledge and skills when investing in stock market in China. Furthermore, in United Kingdom, Diacon (2004) indicated that individual investors have deficiency knowledge and understanding about financial products.

Risk perception is based on how the investor perceived risk on the stock market. It influences investing behavior on how investors are willing to invest. Jacobs-Lawson and Hershey (2005) suggested that it would be interesting to study psychological variables that impact the decision making of investors. However, this study will be based on the risk perception where investors tend to invest but do not rely the importance of risk. There are many variables that influence risk perception. Among them are information asymmetry, overconfidence and financial knowledge. There was only few limited of studies associating information asymmetry, overconfidence and financial knowledge to risk perception in investors in Kota Kinabalu. Therefore, it is interesting to investigate the investor’s risk perception in order to understand and to help financial institution to approach potential investors.


What is the relationship between the information asymmetry and risk


What is the relationship between overconfidence and risk perception?

What is the relationship between financial knowledge and risk perception?

What demographic factors (age, gender, marital status, and education level) moderate the relationship between information asymmetry, overconfidence, worry, and financial knowledge and risk perception of investor in Malaysia Stock Market in Kota Kinabalu?


To examine the relationship of information asymmetry on risk perception.

To examine the relationship between overconfidence and risk perception.

To examine the relationship between financial knowledge and risk perception

To determine whether demographic factors play a moderating role between information asymetry, overconfidence, worry, financial knowledge and risk perception of investor in Malaysia Stock Market in Kota Kinabalu.


The purpose of this study is to survey the investors’ behaviours participating in Kota Kinabalu and it is cross sectional study. Since the research area is in Kota Kinabalu, questionnaires will be distributed to investors who have invested in stocks. Three independent variables (information asymmetry, overconfidence, and financial knowledge), demographic factors (age, gender, and education level) as a moderator variable and dependent variable (risk perception) will be employed to study psychological risk perception in investors.


This study will provide an in depth understanding of investors’ behaviours towards risk perception in the stock market in Kota Kinabalu. An appreciation on the relationship between information asymmetry, overconfidence and financial knowledge is important to identify investor behaviour and their reaction and willingness to take investment risks. Implication of this study would benefits to investment financial advisors in advising potential investors and to influence investment decision making success, thus presenting an opportunity to make a superior investment return.


1.7.1 Risk perception

Many definitions can be described as risk. Liles (1981) defined risk as the probability of a negative outcome occurring from some course of action. Risk is the uncertainties where by investors invest with guessing and hoping high rate of return

17.2 Information asymmetry

Transaction of superior information which happens to seller knows more than the buyer or vice versa.

1.7.3 Overconfidence

Investors have too much confidence in the accuracy of their judgment and their judgement is usually not as correct as they think they are.

1.7.4 Financial knowledge

The ability of a person to understand and a set of skill to determine the risk perception.

1.7.5 Demographic factors

Variables of a population such as age, gender, and education level. Data collected through survey of the demograhpic factors with every investor of a population.




To illustrate the literature review, a brief discussion will be discussed on behavioral finance, conceptual definition of dependent variable (risk perception), independent variables (information asymmetry, demographic factors, overconfidence and expert knowledge) and the relationship between dependent variable and independent variable.


Behavioural finance is a part of finance that there is involvement in psychological decision processes. Investor behaviour and stock market are closely related in behavioural finance. Ricciardi and Simon (2000) studied the behavioural finance explaining the emotional process which influences investor in decision making process.

Behavioural finance is a field of finance that proposes psychology-based theories to explain stock market anomalies (Baltussen, 2009). It is assumed that the information structure and the characteristics of market participants systematically influence one’s investment decisions as well as market outcomes. Behavioural finance attempts to fill the void that market hypothesis cannot captured plausibly in models based on perfect investor rationality. Behavioural finance has two building blocks: cognitive (how people think) psychology (too confident with their experience) and the limits to arbitrage (predicting in what circumstances arbitrage forces will be effective and ineffective or when markets will be inefficient) (Ritter, 2003).

Psychological factors (Ricciardi and Simon, 2000) included in the behavioural finance theory where psychological factors influence the financial decision making process of individuals. Knowledge is a part of psychological factor that influence investors to make decision. Types of information determine the investor to seek and understand where the stock market is going. Thus, he or she will decide to make decision to purchase stock.

Emmanuel, Harris, and Komakech (2010) mentioned on cognitive psychology in terms of investors’ beliefs and preference during decision making. Investment portfolio in stock market will be judged by investors and decide whether portfolio market is beneficial to them. Experience and memory to search information are the components that determine the investors to make decision. Additionally, personal knowledge provides opportunity when making comparison and will be evaluated.

For instance, behavioural finance described psychological biases influence investor behaviour and stock prices (Nik, 2009). Investors refer to past performance to evaluate the present performance in stock market. They do not involve all asset categories. The perspective will change when making decision as investors have make comparison the period of time. In addition, investors behave aggressively when purchasing stock as they do believe that high profit gain. On the other hand, investors who do not have confident are only to purchase the small amount of stock.

Ritter (2003) stated that the cognitive psychology include overconfidence where investors are confident on their abilities. In entrepreneurship context, entrepreneurs are overconfident because they believed participate in market industry do face risk and as a return, they earn high profit. In finance, an example illustrate in the study which is too little diversification, investors only invest in one item rather than two or more items. Because of that, they invest too much in stock company.

Besides that, Ricciardi (2004) stated that psychology influence a person perceive risk of activity. Personality traits and demographic play an important role which differences among survey respondents.


Risk is the matter of perception that is related to problems in business and economics (Brachinger and Weber, 1997). People assumed risk is a negative preference and bad outcome. However, Brachinger and Weber (1997) stated that risk increase when gamble appears many times and risk decreases when there are positive translations. For instance, risk is used to evaluate and predict choices under uncertainty.

In finance, risk is the main determinants of investment decision (Ozer, Ergeneli and Karan, 2004). Investors act irrationally and concerned all information when making investment decision. Limited information expose to individual investors in risk perception. Insufficient information lead to investor act irrational when involve in decision making. Hence, understanding the risk perception is vital of how risk perception is measured. Therefore, psychological factors are relevant in risk perception among investors.

Ricciardi (2007) focused on the risk perception in behavioural finance. In the literature review, behavioural approach is used in the risk to evaluate through laboratory experiment and questionnaire instrument. Questionnaire is the method that used to test on investors behaviour whether they have understand on risk perception towards stock market. Therefore, risk is classify as subjective and contained the beliefs, attitudes and feelings towards risk.

Willingness to take risk is depending on how investor tolerates the risk. Some investors are conservative that they afraid to lose money. Risk perception is that what is the maximum risk exposure that they want to take and comfortable with. They can make portfolio mix by doing ratio between stocks and fixed income. This could be the best method that can decrease the risk exposure (Chambers and Rogers, 2004).

Furthermore, Ricciardi (2007) mentioned the risk tolerance where investors feel better with the natural risk given type of investment. Product investments are those investors who feel comfortable with risk tolerance during invest. To match their product investments, people tend to invest base on their risk level. Investors do not change their mind and consider what they perceived. Therefore, risk increases when investors invest more assets in investment (Kendirl and Tuna, 1999).

Several studies found that risk perception is influenced by psychological factors. For example, McConnel, Gibson and Haslem (1985) examine the knowledge towards risk taking behaviour. The shareholders are the respondent and are answered through mailed questionnaire. It was to access to see whether the investors’ knowledge is positively correlated with specific risk-return preferences. Three risk-return preferences were utilized for calculating risk preference.

Also, in 2000, Houghton, Simon, Aquino and Goldberg introduced the three independent variables (laws of numbers, illusion of control, and overconfidence) to investigate the risk perception decision making. A surveyed was conducted with business college students. The findings showed that the laws of numbers and illusion of control decreased in risk perception and overconfidence was not correlated in risk perception.

Yip (2000) investigated the financial risk tolerance as a psychological trait. Students were participated on-line trading simulation and risk tolerance was measured through pre competition, post competition and takes up eight weeks after the competition. Financial experience and knowledge do not affect the stability of risk tolerance. In trading strategies, males are more risk than women. Therefore, financial risk tolerance is considered as a trait.

Besides that, different level of risk was examined by Grable and Lytton (1999) to investigate the demographic, socioeconomic and attitude on individual behaviours. A survey is located in Southeastern United States and divided into two category respondents (above average versus below average risk tolerance investors). Statistical method discriminant analysis was utilized in grouping investors into risk tolerance.

Walia and Kiran (2009) studied an analysis of investors’ risk perception towards mutual funds services. The investors’ purchase decision for mutual funds is influenced by chain of factors. Investor should opt for investment avenue are determined by the risk and expected return. Structured questionnaire were designed with 5 point Likert scale used to measure the risk perception towards various financial avenues. Respondents were investors who had experience of mutual fund investment. Ranking and raking methodology was also followed to prioritize the investor’s preferences.

Veld and Merkoulova (2008) studied the risk perceptions of individual investors. The purpose of this paper is to test which risk measures influence the individual investors’ decision making. Experimental questionnaire were tested based on 2226 members of a consumer panel. Questionnaire contains experimental questions in the form of pairwise comparisons and also tested whether the answer to the experimental questions are related to demographic of the respondents. The result showed a comparison of stock and bond investments is interesting for their purposes, since these two categories not only have a different amount of risk associated with them, but also differ in their risk profile; respondents with a preference for the semi-variance as a risk measure are more likely to hold individual stocks. Overall, results of these regressions show that the different types of risk attitudes among individual investors found significant directly translate into their investment behaviour.

Sung and Hanna (1996) investigated that financial risk has on effect of financial and demographic variables. Employed respondents were participated in the 1992 Survey of Consumer Finances. To measure this, logistic regression analysis showed that female headed household were risk tolerant compare to male head or a married couple. In this research, gender, marital status, ethnic group and education found different in understanding of the nature of risk.

Hence, in this study, risk perception is conceptualized because they are measurable, and can be self rated by respondents. The risk perception as dependent variable is in line with previous studies.


Information asymmetry is the private information where one party receive more or better information than the other. It is crucial because it create imbalance of power transaction. Private information causes to unequal information refer to information asymmetry that investors know more about firm’s fundamental value (Lu, Chen and Liao, 2010).

Cheng (2003) defined information asymmetry as the important sources in stock markets. Disclosure information gives impact to the investors on irrational investment decision. The paper illustrates information influence the value of stock which categorized as subjective risk derived from investors’ risky behaviours.

Moreover, Rose and Marquis (2006) stated that financial information cannot easily access its quality at the time they must pay for it. Therefore, incentive exists for sellers of information to make wild claims about the quality and value of the information they are selling. In contrast, Ross, Westerfield, and Jaffe (2010) explained that manager in the stock company does know more than typical investors. They can estimate the worth of the company while investors become careful when invest the stock.

Previous has found that there is negative relationship between voluntary disclosure based on U. S. GAAP with certification of a credible audit firm and the variation of risk adjusted returns (Lam and Du, 2004). For instance, Wang, Shi and Fan (2006) found that level of risk perception among Chinese investor is low and lack of investment knowledge and skills. Information asymmetry restrict from insufficient information sharing result in negative outcome (Clarkson, Jacobson and Batcheller, 2007).

On the other hand, Lu, Chen and Liao (2010) stated that information asymmetry and information uncertainty has the effect on corporate bond yield spreads. It is to found that information uncertainty and information asymmetry play important role. Corporate bond investors are willing to pay at high risk premium when information asymmetry and information uncertainty is high. They assumed that there is positive relationship between information asymmetry and firm’s fundamental value risk. Investors prefer to have information asymmetry and this effect on quality of public information (Alford and Jones, 1998).

According to Epstein and Freedman (1994), respondents (investors from shareholders) reported that they are interested in collecting their company report on certain aspects of social activities. In addition, they insist the company to provide other information such as report ethics, employee relations and community involvement. Furthermore, a high demand appear when respondents using social information for investment decisions. Investors are willing to pay high price to obtain information asymmetry in which the information provided is protected and the quality is better (Drobetz, Gruninger, Hirschvogl, 2010).

For the purpose of this study, information asymmetry is conceptualized as uni-dimension variable which includes the general aspects of financial information among investor stock market in Kota Kinabalu. Thus, information asymmetry is an important aspect of people’s knowledge to determine whether the information asymmetry is valuable to evaluate on risk perception.


There are many main definitions for overconfidence. Overconfidence is systematic bias and is interpreted as overestimation of the accuracy of private information. Heller (2010) defined overconfidence as people who believe themselves as to be better than average. This bias is related to overly positive self evaluations and to over-optimism about the future and this phenomenon is reported to be positively related with different criteria of mental health (Taylor and Brown, 1988).

Investors tend to be overconfidence when making decisions which also influence the risk perception (Skala, 2008). Overconfidence can illustrate the individual investor overestimate their abilities (Ricciardi and Simon, 2000). According to Odean (1999), overconfident described as investor who overestimates the accuracy of his information signals. Investors tend to have self confident where they believe that trade more will return high profitability. However, overconfident investors do not rely on financial advisor as they know better than others. As a result, they generate low profit.

Barber and Odean (2001) stated that men are more overconfident than women. In the literature review, psychologists find that finance men are more overconfidence than women. Men trade more and their performance decrease if trade excessively. Moreover, men are overconfident to make financial decisions and thus expect men to make common stock investments. Investors have overestimation on their own valuations this become less concern themselves (Odean, 1999). This indicates that investors have different opinion. Further, rational investor trade only when purchase information and increases expected utility while low expected utility refer to irrational investor (overconfident). Therefore, overconfident investor faces riskier portfolio.

Investors’ confidence has greater ability to beat market (Doran, Peterson, and Wright 2010) Evidence provides that confidence give an impact to decision risk behaviour (Haleblian, Markoczy, McNamara, 2004). Personal attributes such as confidence is examined on the effect of risk taking behaviour (Haleblian et al., 2004). Investors believed that they have confident in selecting portfolio (Dittrich et al., 2001). Furthermore, investors’ overconfidence might show relationship with risk tolerance (Pan and Statman, 2010).

Confidence is importance of investors and situational factors in affecting risk taking behaviour (Haleblian, et al., 2004) Young investors do affect the risk perception as they are overconfident compare to elderly (Kovalchik, Camerer, Grether, Plott and Allman, 2003). The result showed that there is significant between confidence and risk taking behaviour (Haleblian et al., 2004).

Dittrich, Guth and Maciejovsky, (2005) assumed that investors have well in evaluation on portfolio choice. Risky portfolios are those that investors are willing to take risk and have intention to invest more (Nosic and Weber, 2010). They described investors are risk taker as risky effect on overconfidence in the stock.

On the other hand, investors on risk perception reduce when they have high confidence (Dittrich et al., 2001). Dorn and Huberman (2005) did not found there is significant between overconfidence and risk taking. Houghton, Simon, Aquino and Goldberg (2000) surveyed 154 business college students and result showed that there is negative relationship between overconfidence and risk perception. Pan and Statman (2010) suggest that investors should seek financial advisor as they might prefer trade stocks and choose in market timing. However, investors who trade aggressively (overconfidence) are dissatisfied when financial advisor give suggestion.

Glaser and Martin Weber (2004) concluded that overconfidence is connected with trading volume of individual investors. Most of the investors think they are trade better than others. Therefore, investor behaviour trade aggressively in stock market.


Financial knowledge defined as investors know and understand the types of investment product, operates and understand the use of money (Pellinen et al., 2011). Understanding the market situation improve investor to seek an overall opportunity and thus, he or she will decide which product is best to invest. Furthermore, increase knowledge develops the understanding whole market. Financial knowledge refers to investors who know better than others (Pellinen et al., 2011). A result found that knowledge levels have consistency with risk perception (Pellinen et al., 2011). For instance, investors prefer to choose low risk investment instruments if they have low ability (Pellinen et al., 2011).

Psychology show changes in the level of a person’s knowledge result in an adjustment in their risk perception of a specific activity. Ricciardi (2004) stated that level of knowledge might influence an investment professional’s risk perception. Type of information is related to risk perception (Schawrzkopf, 2007). Investors received different information determines their changes in risk perception.

Previous study has shown that behavioural accounting utilized behavioural risk indicators include knowledge characteristic from risky activities in psychology (Koonce, McAnally and Mercer, 2005). The purpose of this study is to investigate how respondents perceive risk based on nineteen financial items in each level of risk. Forty finance students were participated in this study and answered through questionnaire. The findings showed that financial knowledge is significant to risk perception. In other words, financial knowledge influence investors’ risk perceptions to decide which financial items are suitable.

Several issues of knowledge has been done by Fischhoff, Slovic, Lichtenstein, Read, and Combs (1978) and Rao and Monroe (1988). There is connection between psychology of knowledge and risk perception (Ricciardi, 2004).

Increasing knowledge leads to changes in investors’ behaviour (Hilgert, Hogarth and Beverly, 2003). Therefore, providing information such as financial education is very important to help investors for making investment decision. Moreover, investors’ knowledge enhances them to participate investment and leads to improvement in financial management practices (Hilger et al., 2003).

However, knowledge does not catch attention for investors. For example, Lawson and Hershey (2005) focused on the knowledge of retirement planning and risk tolerance. It is to found that financial knowledge is less interaction with risk tolerance. Furthermore, level of understanding on risk perception is still very low (Cheng et al., 2009). It is reported that 33% of respondents are lack of knowledge. They suggest that education is important to investors that affect their risk perception.

Dionne and Triki (2005) mentioned that financial knowledge is vital for investors. Invest stock is beneficial if investors received financial information. As mentioned by McConnel, Gibson and Haslem (1985), risk increase when investor gain more knowledge. Moreover, there is high level of financial knowledge with risk tolerance (Lawson and Hershey, 2005). It is to found that knowledge was positively related to risk tolerance (McConnel, Gibson and Haslem, (1985). Grable and Joo (2000) found that risk factors most significant psychological factors namely financial knowledge.


Demographic factors are an important part in this study to identify the respondent’s characteristics which includes the personal information like gender, age, income, education, marital status and job position. For this current study, age, gender, and education level are chosen as the moderator which moderate between independent variables and dependent variable.

2.7.1 GENDER

Gender differences investors for investment decision. Perspective between male and female has dissimilarity in risk perception. Most of the researchers found that women are more risk averse (Loible and Hira, 2007; Lascu, Babb, and Phillips, 1997). Women are cautious when making decision and they assumed that invest heavily in investment will affect their profitability.

For instance, Graham, Stendardi, Myers and Graham (2002) reviewed the gender differences in investment strategies from an information processing perspective. Also, selectivity model theory and investor behaviours differences in risk aversion and confidence. Male investors will tend to focus on the most salient cue in the investment situation, in most cases being the expected return of the investment. Female investors would be more likely than male investors to incorporate risk and other secondary information cues in their processing of credibility was less valued in the non-financial performance measurement context than in the earnings estimate setting.

In a different point of view from gender scenario, Maxfield, Shapiro, Gupta and Haas (2010) explored that women’s risk taking and reasons for stereotype persistence in order to inform human resource practice and women’s career development. Female managers are surveyed using Simmons Gender and Risk Survey database. Result found that even women take risks, their risk taking remain concealed.

Gender and environment factors such as individual experience and the shared family environment or social interactions are focused in this study (Barnea, Crongvist, Siegel, 2009). The results showed that gender, age, height, and parental background have an economically significant impact on willingness to take risks (Dohmen, Falk, Huffman, Sunde, Schupp, Wagner, 2009). Sung and Hanna (1996) female headed household were risk tolerant compare to male head or a married couple. In this research, gender, marital status, ethnic group and education found different in understanding of the nature of risk (Sung and Hanna, 1996).

Findings showed that genetic component accounts for a very substantial proportion of the variation compared to other individual characteristics such as age, gender education and wealth (Barnea et al, 2009). However, age and gender were not significant to risk tolerance compare to other significant factors (Grable and Lytton, 1999). The findings showed that willingness to take risks is negatively related to female (Dohmen, Falk, Huffman, Uwe, Schupp and Wagner, 2005). Ahmad et al. (2009) showed that gender is the least important in market fundamental. Furthermore, changes of large population of elderly are predicted to be conservative group of investors that influence macroeconomic performance Dohmen et al (2005).

In this study, gender is conceptualized as a moderator factor in demographic factors to test its relationship between independent variables and dependent variables. As suggested by Barnea, Crongvist, Siegel (2009), age could be an indication of the respondent’s which could affect the independent variables and dependent variables. The longer an investor invests, the longer him or her gain experience they are than younger investor.

2.7.2 AGE

Ricciardi (2004) clarify that age difference such as younger and older population in demographic. Age differences in risk preference, risk perception and risky decision making do not have consistent evidence that young investors are less risk adverse than the conservative investors (Gardner and Steinberg, 2005).

Different age among investors determine risk perception for investment decision (Junkus and Berry, 2010). According to Ahmad et al. (2005), a study showed that age have significant role in advisor’s perception. Grable and Joo (1999) stated that younger persons are more risk tolerant than older persons.

Dohmen et al. (2009) stated that age have significant impact on willingness to take risks. A study showed that there is significant between age and risk attributes (McInish, 1987). However, there is negative relationship between age and willingness to take risk (Dohmen et al. 2005). Age does not explain any significance on risk tolerance behaviour of sampled respondents (Grable and Joo, 2000). Other research would be McInish and Srivataba (1984) investigated the nature of individual investors’ heterogeneous expectations that age does not explain logical differences in investors’ expectations of stock returns.

In this study, age is conceptualized as a moderator factor in demographic factors to test its relationship between independent variables and dependent variables. As suggested by Dohmen et al. (2009), gender could be an indication of the respondent’s which could affect the independent variables and dependent variables. The male investor tends to invest more compare to woman investor. Thus, male investor on risk perception reduces when he collected information asymmetry.


Most of the research showed that there is positive correlation for education. For example, Ahmad, Rana and Hassan (2009) stated that education have significant role in determining the investment style of investor. In this research, education found different in understanding of the nature of risk (Sung and Hanna, 1996).

Investors who have educational background tend to have positive impact on their ability on analyzing risk perception (Hu, Lin and Li 2008). Better educated provide understanding on the risk perception in the stock market (Junkus and Berry, 2010).

Grable and Lytton (1999) found that there is positive relationship between educational level connected with risk tolerance and claim that educational level is the best predictor of risk tolerance behaviour. Dohmen et al. (2005) found that there is significant between education and willingness to take risk. Dohmen et al. (2009) showed education have significant impact on willingness to take risk.

Donkers and Soest (1999) discovered that there is significant between education level and risky assets. Investors who hold higher education tend to invest more risky asset such as stock. They consider themselves invest risky asset would receive greater return.

2.8 Summary

The chapter reviewed literature on risk perception and its relationship with risk perception. Based on the findings from literature reviews, definition conception on risk perception, information asymmetry, overconfidence, financial knowledge and demographic factors variables are developed.

Furthermore, it is important to understand the investor behaviour where investor may act as irrational or rational when investing. Depending on the market situation, investors tend to invest more and believed that there is higher return if purchase present while investors remain silent because they want to avoid the loss profit. In addition, risk perception influences the investor behaviour on market situation. Therefore, investigation in this study is needed for further study.



3.0 Introduction

The chapter outlines the theoretical framework, research hypotheses, research design, sampling, instrument, data collection and data analysis methods. This research is aimed to seek for the relationships of information asymmetry, overconfidence, worry, financial knowledge, demographic factors and risk perception.

3.1 Theoretical framework

The independent variables of the framework consist of information asymmetry, overconfidence and financial knowledge, dependent variable is risk perception while demographic factors are the moderator variable. Independent variables in the framework, information asymmetry, overconfidence and financial knowledge are standing by itself to demonstrate a general statement in the study.

Finance practice in the framework is represented by information asymmetry. Overconfidence and financial knowledge are included into the framework with finance practice (information asymmetry) variable to generate a wider situational analysis, in investigating the determinants of risk perception.

Figure 1.1 in the next page demonstrate the research framework relating to the direct relationship between the three (3) independent variables, one (1) moderator and dependent variable.



Figure 1.1 The research framework

Information asymmetry

Risk perception


Financial knowledge

Demographic factors



Education level

3.2 Research hypotheses

Based from the research framework developed earlier, five (5) hypotheses are developed for the purpose of this study.

3.2.1 Relationship between of information asymmetry and risk perception

Lu, Chen and Liao (2010) viewed information asymmetry is positively related to risk perception. Information asymmetry leads to high risk by obtain information from company which will help the investors to perceive the stock market. In this study, it is crucial to know how these general aspects of information asymmetry could be significant to risk perception.

The new conceptualized information asymmetry discussed in this study includes the aspects of the market condition and financial condition. Therefore, it is hypothesized that:


H1: There is significant relationship between information asymmetry and risk perception

3.2.2 Relationship between overconfidence and risk perception

Pan and Statman (2010) stated that there is significant between overconfidence and risk perception. Investor invests more when they see there is potential to gain profit. Therefore, risk perception will increase when they have high confidence. On the other hand, there is no significant between overconfidence and risk taking (Dorn and Huberman, 2005). Thus, it is interesting to know if overconfidence could have impact on the risk perception among investors in Kota Kinabalu. Therefore, it is hypothesized that:


H2: There is significant relationship between overconfidence and risk perception

3.2.3 Relationship between financial knowledge and risk perception

Financial knowledge is found consistency with risk perception (Pellinen et al., 2011). Financial knowledge is important for investors to enhance a better understanding on risk perception. Risk increases when investors gain knowledge. There is positive relationship between financial knowledge and risk perception (McConnel, Gibson and Haslem, 1985). Therefore, it is hypothesized that:


H3: There is significant relationship between financial knowledge and risk


3.2.4 Demographic factors moderate between independent variable and dependent variable

Dohmen et al. (2009) stated that the age has significant impact on willingness to take risks. Different age view risk perception differently. Young investor is willing to take risk. Thus, he or she sees risk perception as high. However, in Grable and Joo (2000) and McInish and Srivataba (1984) studies, age does not difference on risk tolerance.

Most of the researcher found that women are more risk averse (Loible and Hira, 2007; Lascu et al., 1997). Although working female seen to be risk taker but a study showed that their risk taking is remain concealed (Maxfield et al., 2010). Male investors expect high return in investment (Graham et al., 2002). They tend to invest more compare to women.

Educational level helps individual investors to analyze investment risk. Education level found hat education level has significant in determining risk (Ahmad et al., 2009). Higher education has the ability on analyzing risk perception (Hu et al., 208). A research found that education level is significant with willingness to take risk (Dohmen et al., 2005). Therefore, it is hypothesized that:


Demographic factors moderate the relationship of information asymmetry, overconfidence and financial knowledge towards risk perception

H4a: Age moderates between the relationship between information asymmetry and risk perception

H4b: Age moderates the relationship between overconfidence and risk perception

H4c: Age moderates the relationship between financial knowledge and risk perception

H4d: Gender moderates the relationship between information asymmetry and risk perception

H4e: Gender moderates the relationship between overconfidence and risk perception

H4f: Gender moderates the relationship between financial knowledge and risk perception

H4g: Education level moderates the relationship between information asymmetry and risk perception

H4h: Education level moderates the relationship between overconfidence and risk perception

H4i: Education level moderates the relationship between financial knowledge and risk perception

3.3 Research design

The research design will be based on sampling design, sampling size, sample selection, unit of analysis, instrument design, data collection method as well as data analysis. This study is primary data which is collected from data collection through questionnaires.

3.3.1 Sampling design

The non-probability sampling is chosen as the sampling design in this study because this study does not have sampling frame. Therefore, judgment sampling is used in this study to focus on individual investors.

3.3.2 Sampling size

Based on Sekaran and Bougie (2010), a rule of thumb which was proposed by Roscoe (1975) is that sample size should be between 30 and 500. Furthermore, according to Sekaran (2003), the sample size should be at least ten times as large as the number of variables of this study. Thus, the sample size in this study should be at least seventy in order to correspond to seven variables which comprise of three independent variables, three moderating variables and one dependent variable.

3.3.3 Sample selection

This study was interviewed in Innosabah Securities Sendirian Berhad. The data is collected through individual investor and they answer their questionnaire on their own. Permission was asked before the survey was done. They will be reminded that the questionnaire focused on risk perception.

3.4 Unit of analysis

The unit of analysis is targeted at individual (investor) level in Innosabah Securities Sendirian Berhad.

3.5 Instrument design

A questionnaire was constructed for this study, adapted from the questionnaire framework by Wang, Shi and Fan (2006), Coleman (2007), Dorn and Sengueller (2009), and Jacob-Lawson (2005).

3.5.1 Questionnaire

The structured questionnaire consists of 5 sections: Section A (Demographic factors), Section B (information asymmetry), Section B (overconfidence), Section C (financial knowledge), and Section D (risk perception).

3.5.1 Section A (Demographic factors)

Section A of the questionnaire derived the demographic elements which are age, gender, and education level. For this purpose study, age, gender and education level are measurable items for demographic factors. Age, gender and education level are common variables determining the relationship between independent variables and dependent (Junkus and Berry, 2010). Age requires the respondents to state the exact figure for more accuracy in data analysis. The other items required respondents to tick down the appropriate response.

3.5.2 Section B (Information asymmetry)

In this study, information asymmetry would measure on categorical data to seek an overall opinion based on their understanding. Five items are given in the answer but only can choose one answer. Information asymmetry is related to the personal information on risk perception. The five items are based on Wang et al. (2006) questionnaire which measures on risk perception.

3.5.3 Section C (Overconfidence)

In section C, four items (C1 to C5) measured aspects on overconfidence. Respondents are required to circle the number that best represent their feeling towards four items.

The four items are based on Dorn and Sengueller (2009) questionnaire which measures overconfidence. This study would use seven-Likert scale to rate the statement ranging from 1 strongly disagree to 7 strongly agree to generate more accurate rating.

3.6.5 Section D (Financial knowledge)

In Section D, there were six items altogether. D1 to D7 are items measured for financial knowledge. Questionnaire was adopted from Jacob-Lawson and Hershey (2005) and some modifications are made. Respondents would circle the number that best represent their feelings towards financial knowledge. The numbers scale is referring to and seven-Likert point scale with code 1 as ‘strongly disagree’ and code 7 as ‘strongly agree’.

3.6.6 Section E (Risk perception)

The risk perception scale is adopted from scale developed by Wang et al. (2006). There were seven questions to measure on risk perception in Section F. Respondent evaluate their own risk perception based on their feeling.

3.8 Data collection method

Data collected are primary data which questionnaires were distributed to individual stock market in Innosabah Securities Sendirian Berhad.

3.8 Data analysis method

Data collected will be analyzed by using Statistical Package of the Social Sciences version 16. Descriptive analysis will show the profile respondents, and the mean of the dependent variable (DV), independent variables (IVs) and moderator variable. The correlation between the DV, IVs and moderator variable will be showed by the correlation analysis. Factor analysis will be tested for classifying the components within the IVs. Cronbach alpha would determine the measured reliability. Later, Multiple Regression will run the relationship between DV and IVs and hierarchical Regression will test the effect of moderator variable on the relationship between DV and IVs.

3.8 Summary

Chapter 3 discusses mainly on the theoretical framework, the construction of hypothesis, research design, sampling size, and sample selection, the unit of analysis and instrument design. This chapter also discussed the variables and items measurement and scale, finally using SPSS software as a tool to analyze the collected data.



Age: (years)

Please indicate () in the appropriate box.

Gender:  Female

 Male

Education level:


Please circle the answer based on your opinion.

Definition of information asymmetry: Condition that information is known to some, but not all, participants.

What are your opinions on information asymmetry and its impact on your investment decision?

Information asymmetry does not exist in stock markets

Information asymmetry is just heard of but is not supported by any evidence

Information asymmetry indeed exists in stock market but does not have any impact on investment decision

Information asymmetry frequently happens in stock market and has little impact your investment decision

Information asymmetry has great impact on your investment decision

(Source: Wang, Shi and Fan, 2006)


On a scale of 1 to 7 stated below, please circle the level of agreement and disagreement that overconfidence is present in the following:

Strongly disagree

Moderately disagree

Slightly disagree

Neither disagree nor agree

Slightly agree

Moderately agree

Strongly agree








C1. I am confident of my ability to do better than others in picking stocks.

1 2 3 4 5 6 7

C2. I control responsible for the results of my investment decisions.

1 2 3 4 5 6 7

C3. My past investment successes were, above all, due to my specific skills.

1 2 3 4 5 6 7

C4. I have complete knowledge of stock market

1 2 3 4 5 6 7

C5. I am fully responsible for the results of my investment decisions.

1 2 3 4 5 6 7

(Source: Dorn and Sengmueller, 2009)


On a scale of 1 to 7 stated below, please circle the level of agreement and disagreement that financial knowledge is present in the following:

Strongly disagree

Moderately disagree

Slightly disagree

Neither disagree nor agree

Slightly agree

Moderately agree

Strongly agree








D1. I am very knowledgeable about financial planning for stock market.

1 2 3 4 5 6 7

D2. I know more than most people about stock market.

1 2 3 4 5 6 7

D3. I am very confident in my ability to do investment.

1 2 3 4 5 6 7

D4. When I have a need for financial services, I know exactly where to obtain information on what to do.

1 2 3 4 5 6 7

D5. I am knowledgeable about how Social Security works.

1 2 3 4 5 6 7

D6. I am knowledgeable about how private investment plans work.

1 2 3 4 5 6 7

(Source: Jacob-Lawson and Hershey, 2005)


On a scale of 1 to 7 stated below, please circle the level of familiar and unfamiliar that risk perception is present in the following:

Totally unfamiliar


Moderately unfamiliar

Neither familiar nor unfamiliar

Moderately familiar


Totally familiar








E1. Fluctuation of interest rate

1 2 3 4 5 6 7

E2. Investment intention of market maker/banker

1 2 3 4 5 6 7

E3. Fluctuation of commodity price

1 2 3 4 5 6 7

E4. Improper management of listed company

1 2 3 4 5 6 7

E5. Variation in policies related to stock market

1 2 3 4 5 6 7

E6 Pursuing up-going stock

1 2 3 4 5 6 7

E7 Excessive speculation

1 2 3 4 5 6 7

(Source: Wang, Shi, and Fan, 2006)

Thank you

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