Do Maltese bond investors make rational investment decisions?

Abstract

Behavioural finance is based on the assumption that investors might not always be rational. The attitudes of Maltese bond investors have recently been recorded in empirical literature, but no formal attempt was ever made to specifically study (i) the possible irrationality of Maltese bond investors, and (ii) whether such irrationality could have any adverse impact on the Maltese society. This study is aimed at (i) understanding whether certain activity in the Maltese bond market is driven by investor irrationality or otherwise; (ii) understanding whether (and why) any irrational behaviour in the Maltese bond market persists over time; (iii) identifying the longterm implications of any irrationality displayed by Maltese investors; and (iv) providing policy recommendations. Evidence gathered via a series of research-administered expert interviews with professionals working in the Maltese investment services industry, suggests that irrational behaviour among Maltese investors has persisted over time. Furthermore, the behavioural biases of Maltese investors were found to be primarily driven by a lack of financial education. The persistence of irrational behaviour puts the attainment of people’s investment objectives at risk. Arguably, it can also (i) result in portfolios carrying unwarranted levels of risks; (ii) have a negative impact on the borrowing capability of the Maltese sovereign; and (iii) lead to a general deterioration in the creditworthiness of Maltese corporate bond issuers. Unless investors attain an improved level of investment knowledge, irrational behaviour is bound to persist. In the meantime, policy makers have to ensure that unknowledgeable investors are provided with adequate protection against their own behaviour that can potentially have adverse consequences on their future wellbeing.