Influence of “Snake-Bite” Effect on Investment Return Rate: Lithuanian Example

Abstract

Understanding of investors’ behaviour starts from the investigation of its forming factors. Investment decisions depend on various of them and are often based on fundamental or technical analysis, so advocates of the concept of the rational economic man (Homo economicus) say that investors choose the company that maximizes their economic benefits. In fact, rational investor behaviour is the premise and basis of the majority of classical financial theories and models, but an investor’s decision also reflects his/her subjective evaluations and the perceived risk levels and propensity to take risks are different (Kartašova, 2013). This paper examines one of the basic biases influencing investors’ behaviour – snake-bite effect and provides empirical evidence of its impact on investors’ decisions and, as a consequence, on investment rate or return. Authors assume that Lithaunian individual investors experienced "snake bite" effect become more risk averse and their behaviour reflects in their investment decisions made. The authors conducted Lithuanian individual investors behaviour in financial market pilot study based on their decisions made buying and selling stocks listed on NASDAQ OMX Stock Exchange. Taking into account the investors settled rules during the research the influence of "snake bite" effect to potential gains and losses was investigated. The results allow accepting the authors assumption and provide empirical evidence of the correlation between the investment rate of return and influence of “snake-bite” effect.

DOI: 10.5901/mjss.2014.v5n27p1769