Heuristics influencing investment decision making and investment performance evidence from individual investors in vietnam

Master Thesis Heuristics influencing decision making and performance: evidence from individual investors in Vietnam Nguyen Thi Thanh Thuy Mbus 3.2 Supervisor: Dr Tran Phuong Thao DECLARATION I hereby declare that this thesis, to the best of my knowledge and belief, is my own work and effort and that is has not been submitted, either in part or whole, anywhere for any award Information and ideas taken from other sources as cited as such This work has not been published ACKNOWLEDGE This research would not have been possible without the valuable contribution of many people We would like to take this chance to express my great gratitude for their understanding, encouragement, and supports Firstly, I would like to my deepest appreciation to my thesis supervisor, Dr Tran Phuong Thao, for numerous valuable comments and suggestions I am very lucky to have her supervision as her continuous encouragement has motivated me and made me confident to finish this research Then, I would like to thank the faculty of International School of Business (ISB) – University of Economic Ho Chi Minh City I would also like to show my gratitude to Professor Nguyen Dinh Tho for his patient in listening, discussing, and giving me precious recommendations I am especially indebted to him for his indispensable guidelines with regard to statistical analysis techniques A special appreciation to my friends and colleagues for giving me the sound comments on my questionnaire as well as instant support regardless day or night This helps me a lot in improving the quality of the research Furthermore, we want to express our gratefulness to my friends working at the Ho Chi Minh Stock Exchange and securities companies, who help me to arrange interviews and distribute questionnaires I am also thankful to beneficiary customers who participated in and the survey Finally, it would be impossible to say enough about my dear parents, my respectable teachers at University of Economics Ho Chi Minh City and my loved friends All their understanding, encouragement, and advices help me to overcome the most difficult time to complete this research in time Ho Chi Minh City, June 6th, 2015 Nguyen Thi Thanh Thuy LIST OF FIGURES Figure 2.1 Research model 17 Figure 3.1 Research process 20 Figure 3.2 New research model (revised) 27 LIST OF TABLES Table 3.1 Types of measurement for heuristic variables influencing investment decision making .22 Table 3.2 Types of measurement for individual investors’ decision making 23 Table 3.3 Types of measurement for individual investors’ performance 24 Table 4.1 Descriptive statistic of respondent’s characteristics 31 Table 4.2 Reliability analysis for each factor 35 Table 4.3 Key dimensions, items .37 Table 4.4 Correlation among factors 38 Table 4.5 Regression analysis - Model summary .39 Table 4.6 ANOVA 40 Table 4.7 Regression analysis of variables 41 Table 4.8 Correlation .42 Table 4.9 Regression analysis – Model summary 43 Table 4.10 ANOVA 44 Table 4.11 Regression analysis of variables .44 Table 5.1 Conclusion .49 ABSTRACT The main objective of this study is to investigate the heuristic factors influencing individual investors’ decisions and investment performance at the Ho Chi Minh Stock Exchange As there are limited studies about behavioral finance in Vietnam, this study is expected to contribute significantly to the development of this field in Vietnam The study begins with the existing theories in behavioral finance, based on which, hypotheses are proposed Then, these hypotheses are tested through the questionnaires distributed to individual investors at the Ho Chi Minh Stock Exchange The result shows that there is only overconfidence bias affecting the investment decisions of individual investors at the Ho Chi Minh Stock Exchange among three factors of heuristic (including available bias, representativeness bias and overconfidence bias) Moreover, this study also found out the relationship between decision making of individual investors and investment performance Keywords: Heuristic, performance, Vietnam individual investor, decision making, investment CHATER 1: INTRODUCTION 1.1 Background In the financial markets, investment decisions are commonly made by individual investors and fund managers Their investment decisions are often supported by decision tools such as fundamental analysis, technical analysis and judgment It is assumed that information structure and behavioral factors in the market systematically influence individuals’ investment decisions as well as market outcomes (Mutswenje, 2014) However, in reality, investor behaviors are often derived from psychological principles of decision making to explain why people buy or sell stocks These factors that are normally known as behavioral factors focused upon how investors interpret and act on information to make investment decisions Much of the economic and financial theories presume that individuals act rationally in the process of decision making, by taking into account all available information But there is evidence to show repeated patterns of irrationality in the way humans arrive at decisions and choices when faced with uncertainty (Bernstein, 1996) Behavioral finance, a study of market that draws on psychology, throws light on why people buy or sell stock and why sometimes not buy or sell at all The most crucial challenge faced by the investors is in the area of investment decisions The profit made, or losses incurred by an investor can be attributed mainly to his decision-making abilities The fact that even the most prominent and well-educated investors were affected by the collapse of the speculative bubble in the 2008 subprime crisis proved that something was fundamentally missing in the traditional models of rational market behavior (Subash, 2012) In the behavioral finance discipline, heuristics can be defined as the use of experience and practical efforts to answer questions or to improve performance (Fromlet, 2001) Raines & Leathers (2011) argue that when faced with uncertainty, people rely on heuristics or rules of thumb to subjectively assess risks of alternatives, which reduces the complex tasks of assessing probabilities and predicting values to simpler judgmental operations It could be seeing that, heuristics are quite useful in investment decision making (Waweru et al., 2008, p.27), however they may lead to biases (Kahneman & Tversky, 1974, p.1124; Ritter, 2003, p.431) For instance, Kahneman & Tversky (1974, page 1124) introduce three factors belongs to heuristics namely representativeness, availability bias, and anchoring, while Waweru et al (2008) also list two factors named Gambler’s fallacy and Overconfidence of heuristic There are several studies in the literature investigating the relationship between heuristics and decision making and performance of individual investor as well Tversky & Kahneman (1974) conduct the research of judgment under uncertainty, heuristics and biases Hassan et al (2013) study impacts of affect heuristics, fear and anger on the decision making of individual investor in a conceptual study In addition, another study examines investment behavior and performance of various investor types in Finland’s stock market done by Grinblatt & Keloharju, 2000 1.2 Research problem In the literature, many papers show that investment decision of investors may be affected by behavioral finance Thus, many researchers attempt to investigate psychological and sociological factors such as heuristics that may influence investment decisions making process of individual (Subrahmanyam 2007, Le & Doan 2011, Kengatharan 2014) In Vietnam, the first official stock exchange, namely the Ho Chi Minh Stock Exchange (known as HOSE) has been launched since mid-2000 and five years later, the Ha Noi Stock Exchange, (known as HNX) was established Both the markets have recently significantly developed At the time of establishment, the Vietnamese stock market was still strange and vague to most of local people due to several its limitations such as insufficient legal foundation, simple trading system, very few security companies and limited types of securities (HOSE, 2010, p.7) Recently, the Vietnamese stock market has experienced significant development with regards to the market size and market capitalization As of November 2014, there were 345 companies listed on HOSE, with the listed value of almost 339,000 billion VND and 367 companies listed on HNX, with the listed value of almost 92,422 billion VND, reach over VND 145,000 billion of the total market value However, in comparison to foreign stock markets, Vietnam stock market appears to be much smaller in terms of market size and market capitalization (Le & Doan, 2011) Among the two exchanges, the Ho Chi Minh stock exchange has been developing significantly in both a number of listed stocks and trading values; however, its aggregate market index (VN-Index) movement seems to fluctuate unpredictably over different periods As such, several studies shown that investment decision making of investors, particularly individual investors, in the market is influenced by many factors including behavioral factors such as herding effect, heuristic and market factors (Waweru, 2008, Hassan et al, 2013) Several studies in the literature show that individual investors have difficulties making investment decisions due to lack of financial sophistication (Winchester et al 2011) Individual investors often have embraced heuristics or rule of thumb in their investment decision making (Shikuku, 2010) This issue may raise a concern that whether investment decision making of individual investors in the Vietnamese stock market is influenced by heuristic? Hence, this research attempts to investigate the influence of heuristic factors on influencing individual investors’ decision-making and performance in the context of the Vietnamese stock market 1.3 Research objective and research questions The objective of the study is to investigate impacts of heuristic factors on individual investors’ decision-making and their investment performance More specifically, two questions are given as follows: • Question 1: Do heuristic factors influence individual investors’ decisions in the Vietnamese stock market? • Question 2: Does a strong tendency of investment decision making have a Cấp trở xuống Thạc sĩ Số năm kinh nghi ệm làm việc Dưới năm Xin vui lòng cho biết thu nhập bình qn tháng ơng/bà Dưới triệu Từ 6-12 triệu 12-20 triệu Trên 20 triệu Ông/bà tham gia vào thị trường chứng khoán bao lâu? Dưới năm 1-3 năm 5-10 năm 10 năm 3-5 năm Ơng/bà vui lịng cho biết tài khoản đầu tư ông/bà mở công ty nào? g Công Ty CP Chứng Công Ty CP Chứn Cơng Ty TNHH Khốn Sài Gịn Khốn TP.HCM Chứng Khốn ACB Công Ty CP Chứng Công Ty CP Chứng Công Ty CP Khoán Bản Việt Khoán VNDirect Chứng Khoán MB Cơng Ty CP Chứng Cơng ty TNHH Chứng khốn Ngân hàng TMCP Ngoại thương Việt Nam Công Ty CP Chứng Công Ty CP Chứng Công Ty CP Chứng Công Ty CP Chứng Khoán BIDV Khoán Rồng Việt Khoán Sao Việt Khốn FPT Khốn Maybank Kim Eng Ơng/bà tham gia khóa đào tạo đầu tư chứng khốn chưa? CóChưa Nếu “Có”, vui lịng trả lời câu hỏi 10, “Chưa” vui lòng chuyển sang câu hỏi 11 10 Khóa học đầu tư chứng khốn mà ông/bà tham gia bao lâu? tháng tháng tháng 11 Ơng/bà vui lịng cho biết tổng số tiền đầu tư ông/bà sàn Hồ Chí Minh từ tham gia vào thị trường chứng khoán Dưới 200 triệu Từ 200 triệu đến tỷ Trên tỷ 12 Tổng số tiền ông/bà đầu tư vào sàn Hồ Chí Minh năm vừa qua Dưới 200 triệu II Từ 200 triệu đến tỷ Trên tỷ CÁC YẾU TỐ PHỎNG ĐOÁN ẢNH HƯỞNG ĐẾN QUYẾT ĐỊNH ĐẦU TƯ Xin ơng/bà vui lịng đánh giá mức độ đồng tình ơng/bà phát biểu sau: Các yếu tố Hồn tồn Khơng khơng đồng ý đồng ý Trung lập Địng ý Hồn tồn đồng ý 13 Ơng/bà mua loại chứng khốn “nóng” tránh mua loại chứng khốn sinh lợi năm gần 14 Ông/bà dựa giá để dự đoán thay đổi giá tương lai 5 15 Ơng/bà phân tích xu hướng vài cổ phiếu đại diện để định đầu tư cho cổ phiếu khác? 16 Ông/bà định đầu tư dựa vào kinh nghiệm thân? 17 Ông/bà ưu tiên đầu tư vào cổ phiếu nước cổ phiếu nước ngồi thơng tin cổ phiếu nước đầy đủ 18 Theo ông/bà, thông tin từ người thân bạn bè nguồn tin đáng tin cậy cho trình định đầu tư 19 Ông/bà tin kỹ kiến thức ơng/bà giúp ơng/bà đạt mức sinh lợi cao mức trung bình ca thị trường 20 Ông/bà tin định đầu tư đắn III QUYẾT ĐỊNH ĐẦU TƯ CỦA ƠNG/BÀ Xin ơng/bà vui lịng lựa chọn mức độ đồng tình ơng/bà phát biểu sau đây: Các nhận định IV Hồn tồn khơng đồng ý Khơng đồng ý Trung lập Địng ý Hồn tồn đồng ý 21 Nhìn chung, rủi ro việc đầu tư ông/bà thấp thị trường 22 Quyết định đầu tư ông/bà an toàn 23 Quyết định đầu tư ơng/bà có khả đáp ứng khoản toán lãi suất KẾT QUẢ ĐẦU TƯ CỦA ƠNG/BÀ Xin ơng/bà vui lịng lựa chọn mức độ đồng tình ơng/bà phát biểu sau đây: Các nhận định Hồn tồn khơng đồng ý 24 Ơng/bà cảm thấy hài lịng với định đầu tư ông/bà năm vừa qua (bao gồm định chọn, mua, bán số lượng cổ phiếu lựa chọn, mua bán) 25 Tỷ suất sinh lời việc đầu tư chứng khoán đáp ứng mong đợi ông/bà Không đồng ý Trung lập Địng ý Hồn tồn đồng ý 5 26 Ông/bà đạt mức tăng trưởng thu nhập năm qua APPENDIX APPENDIX – PILOT STUDY Case Processing Summary % N Cases Valid Excludeda Total 94 100.0 0 94 100.0 a Listwise deletion based on all variables in the procedure Reliability analysis for each factor Corrected Scale Mean if Scale Variance Item-Total Item Deleted if Item Deleted Correlation RE1 5.63 3.806 0.522 RE2 5.60 3.663 0.682 RE3 5.69 4.603 0.487 Representativeness bias Cronbach's Alpha: 0.735 AVA1 6.36 2.599 0.471 AVA2 6.30 2.491 0.365 AVA3 6.21 3.202 0.304 Availability bias Cronbach's Alpha: 0.566 OVER1 3.52 0.962 0.519 OVER2 3.53 0.983 0.519 Overconfidence bias Cronbach's Alpha: 0.683 DEC1 6.80 2.701 0.656 DEC2 6.43 2.871 0.659 DEC3 6.33 2.912 0.628 Investment decision making Cronbach's 0.802 Alpha: PER1 7.18 3.419 0.679 PER2 6.93 3.059 0.773 PER3 6.89 3.515 0.696 Invetsment performance Cronbach's Alpha: 0.847 Cronbach's Alpha if Item Deleted 0.700 0.496 0.727 0.316 0.491 0.565 a a 0.721 0.718 0.749 0.821 0.728 0.805 KMO and Bartlett's Test Kaiser-Meyer-Olkin Measure of Sampling Adequacy Bartlett's Test of Sphericity 804 510.314 Approx Chi-Square 91 df 000 Sig Rotated Component Matrixa Component RE1 700 RE2 844 RE3 755 AVA1 762 AVA2 508 404 AVA3 777 OVER1 646 OVER2 720 DEC1 863 DEC2 804 DEC3 741 PER1 795 PER2 840 PER3 745 Extraction Method: Principal Component Analysis Rotation Method: Varimax with Kaiser Normalization a Rotation converged in iterations APPENDIX LIST OF SECURITIES FIRM SELECTED No Name of securities company Saigon Securities Incorporation Hochiminh City Securities Corporation ACB Securities Company Ltd Viet Capital Securities Joint Stock Company VNDirect Securities Corporation MB Securities Joint Stock Company FPT Securities Joint Stock Company Vietcombank Securities Company Ltd Maybank Kim Eng Securities Joint Stock Company 10 BIDV Securities Joint Stock Company 11 Rong Viet Security Joint Stock Company 12 Sao Viet Securities Joint Stock Company APPENDIX KMO and Bartlett's Test Kaiser-Meyer-Olkin Measure of Sampling Adequacy Bartlett's Test of Sphericity 764 949.809 Approx Chi-Square 91 Df 000 Sig APPENDIX Rotated Factor Matrixa Factor PER2 797 PER3 759 PER1 700 AVA3 RE2 771 RE1 667 RE3 645 AVA1 636 AVA2 427 DEC1 871 DEC2 649 DEC3 558 OVER1 752 OVER2 579 Extraction Method: Principal Axis Factoring Rotation Method: Varimax with Kaiser Normalization a Rotation converged in iterations APPENDIX KMO and Bartlett's Test Kaiser-Meyer-Olkin Measure of Sampling Adequacy Bartlett's Test of Sphericity 753 832.674 Approx Chi-Square 66 Df 000 Sig APPENDIX Rotated Factor Matrixa Factor PER2 836 PER3 740 PER1 709 RE2 784 RE1 690 RE3 650 AVA1 590 DEC1 864 DEC2 654 DEC3 564 OVER1 802 OVER2 547 Extraction Method: Principal Axis Factoring Rotation Method: Varimax with Kaiser Normalization a Rotation converged in iterations APPENDIX APPENDIX TABLE OF CONTENTS CHATER 1: INTRODUCTION 1.1 Background 1.2 Research problem 1.3 Research objective and research questions 1.4 Scope of the research 1.5 Structure of the thesis CHAPTER 2: LITERATURE REVIEW, HYPOTHESIS AND RESEARCH MODEL 2.1 Theoritical foundation 2.1.1 Prospect theory 2.1.2 Heuristics theory 2.2 Heuristic of individual investors 2.2.1 Definition of heuristics 2.2.2 Classification of heuristics 2.3 Decision making and performance of individual investor 11 2.3.1 Decision making 11 2.3.2 Investment performance 12 2.4 Hypothesis Development 13 2.4.1 Representativeness and investors’ decision making 13 2.4.2 Availability bias and investors’ decision-making 15 2.4.3 Overconfidence and investors’ decision making 15 2.4.4 Investment decision making and investment performance 16 2.5 Conceptual model 17 2.6 Chapter summary 18 CHAPTER 3: RESEARCH METHODOLOGY 19 3.1 Research process 19 3.2 Research design 21 3.2.1 Measure of heuristic factors 22 3.2.2 Measure of investors’ decision making 23 3.2.3 Measure of investment performance 24 3.3 Pilot test 25 3.4 Main survey 27 3.4.1 Sampling 27 3.4.2 The research method 28 3.5 Chapter summary 30 CHAPTER 4: FINDINGS AND DISCUSSIONS 31 4.1 Data background 31 4.2 Measurement Reliability using Cronbach’s Alpha 34 4.3 Scale testing by using Exploratory Factor Analysis (EFA) 36 4.4 Test hypotheses by multiple regressions 37 4.4.1 Regression analysis of variables representativeness, overconfidence and investment decision making (Model 1) 38 4.4.2 Regression analysis of variables investors’ decision making and investors’ performance (Model 2) 42 4.5 Chapter summary 45 CHAPTER 5: CONCLUSION AND RECOMMENDATION 46 5.1 Conclusions 46 5.2 Implication of the study 49 5.3 Limitation and direction for further research 49 ... the individual investors? ?? decision- making in Vietnam Hypothesis H4: The individual investors? ?? decision- making positive impact on their investment performance in Vietnam 2.6 Chapter summary In. .. the individual investors? ?? decision- making in Vietnam 2.4.2 Availability bias and investors? ?? decision- making According to Shefrin (2002), availability bias occurs because investors reply on information... faster promotion and greater investment duration (Oberlechner & Osler, 2004, p.3) 2.3 Decision making and performance of individual investor 2.3.1 Decision making Making investment decision is even