PAMM-system on Forex: the economic behavior of investors

At the moment, interest rates on ruble and foreign currency deposits in banks are inferior to the real one InflationIn other words, depositors, at best, will only be able to save their money. At the same time, investing through trust management in the banking sector is limited by high initial fees. And investments in real estate, in addition to no less high entry threshold, also have certain risks. Against this background, one of the most affordable ways to place free cash for profit are the following instruments of trust management on the FOREX marketwhich includes PAMM system.

PAMM as an alternative to bank deposits

PAMM system (from English Percent Allocation Management Module) is designed to guarantee the agreed profit distribution between the Investor and the Manager. The system of PAMM-accounts is spread mainly on the international currency market. FOREX market. The Broker providing this service is the responsible guarantor of the agreement.

PAMM system - is quite common in developed countries, where the level of financial regulation, competence of managers, and investor confidence are much higher.

Pursuing a goal to fully correspond to the high level of the international company, RVD Markets Limited regularly conducts scientific research, the purpose of which is to identify and analyze the factors that contribute to the optimization of services provided. In particular - in the sphere of behavior of investors. In the last research the main attention was paid to the analysis, identification of the main links and dominant tendencies of investors' behavior after the loss of part of the invested funds (drawdown). For this purpose, the results of a number of PAMM accounts of the company were considered in order to describe the peculiarities of investors' economic behavior.

Initial parameters of PAMM study

The problem of human behavior in the economic environment has been traditionally dealt with by economic science. It is centered on the model of economic man, a kind of an agent of an ideal market, acting on the basis of internal rationality. Most modern scientists describe the process of development of economic sciences as an interrelation with psychology, which considers the problems of behavior from its own perspective, which in turn is necessary for a comprehensive and deeper study of models of human economic behavior.

Studying the peculiarities of investors' economic behavior is the key to understanding the events taking place in the financial markets. After all, the incentives for certain actions are formed under the influence of a complex of external and internal factors, such as personal physiological and psychological needs, knowledge, experience acquired in the past, the influence of socio-economic conditions, which are determinants of human behavior in the modern socio-economic environment.

Within the framework of the research experts were also interested in the peculiarities of such factor as drawdown and behavioral characteristics of investors in the situation of its occurrence.

Drawdown (DrawDown) - is a loss or losses on a deposit opened for trading activities on stock exchanges. Most often the amount of drawdown is estimated as a percentage of the initial or maximum amount reached - 100% drawdown is a complete loss of funds on the account.

We will understand under drawdown the partial loss of funds by investors in a PAMM account. 149 people participated in it. Gender distribution of the sample: 64% men (94 people) 36% women (54 people). Socio-economic characteristics such as age, gender, current balance, and investor behavior after drawdown (contract renewal, partial withdrawal and full withdrawal) were also taken into account.

The subjects were distributed according to their current balance at the time of drawdown (see Figure 1)

Fig. 1. Current balance of investors at the moment of drawdown.
Fig. 1. Current balance of investors at the moment of drawdown.

Investors' actions after the drawdown are shown in Figure 2.

Figure 2. Percentage of investors' behavior after drawdown.
Figure 2. Percentage of investors' behavior after drawdown.

The diagram shows that the majority of investors (126 people) renewed the contract, thus continuing their participation in PAMM account despite the drawdown.

Psychological component of investing

Gender of the investor

In order to identify socio-psychological factors determining investors' behavior as a result of drawdown, the statistical method of classification tree was used (see Fig. 3). Initially, age, gender, current balance, and investor behavior after drawdown were considered as factors. As a result of the calculation, it was found that the significant factor is floor.

Figure 3. Classification tree.
Figure 3. Classification tree.

According to the classification tree, female investors made prolongation of the contract after drawdown in number of 51 persons, which is 94.4% of the total number of women in PAMM account. In comparison with men, who have prolonged the contract in the number of 75 people, which is 79.8% of the total number of men, we can say that women are more predisposed to continue working, as well as their desire for long-term cooperation, despite the risk of losses. This is also evidenced by the data on partial withdrawal, which is completely absent in women and 5.3% in men (5 out of 94).

Current balance and age of the investor

In addition, statistical processing of such indicators as current balance and age of investors. Since the distribution of the quantitative variable current balance differs significantly from the normal law, Spearman's rank correlation coefficient rs = - 0.253; p = 0.002 was calculated to identify the relationship between age and current balance. The negative correlation coefficient indicates that the younger the investor, the higher the deposit amount.

In this regard, we can conclude that the economic behavior of investors largely depends on age. Thus, young people choose a more risky style of behavior, hoping for a higher income, we can say that they have a stronger manifestation of such a character trait as a propensity to risk.

Risk appetite can be described as a psychological property of a personality, which causes preferential reactions of a person in activity and behavior. It is a tendency to act randomly in the hope of a happy outcome, to act under conditions of uncertainty or possible danger. Subjects characterized by a high propensity to risk, prefer a dangerous variant of action to a safe one. At the same time, risk appetite expresses a person's willingness to choose situations of uncertainty, thereby exposing themselves to danger and experiencing thrills.

In turn, more mature Investors prefer a steady incomeand are more conservative in this regard, favoring lower risks.

It can also be added that if a young investor can still recover lost deposits, then for an elderly investor, such an opportunity may no longer exist, and the loss of capital can be a heavy blow.

Summing up the research conducted by RVD MarketsLimited, it is possible to allocate a number of important moments in the organization of work of PAMM-accounts.

  • First of all, it is necessary to take into account the gender and age characteristics of investors. The results show that women are more predisposed to long-term investment, where there is an element of risk in the form of partial loss of funds.
  • It is worth noting the age characteristics of young investors, as they have shown themselves to be more risk averse. These results are relevant both for investors themselves and for investment services companies and will help the latter to improve their performance.

With the practical experience of investing in PAMM accounts you can read in this article:
Investing in PAMM accounts in practice: creating a portfolio on 500$

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