1 NATIONAL ECONOMICS UNIVERSITY ADVANCED EDUCATIONAL PROGRAM ***************************** BACHELOR THESIS EMPIRICAL RESEARCH ON IRRATIONAL BEHAVIORS OF INDIVIDUAL INVESTORS IN VIETNAM STOCK MARKET St[.]
1 NATIONAL ECONOMICS UNIVERSITY ADVANCED EDUCATIONAL PROGRAM ***************************** BACHELOR THESIS EMPIRICAL RESEARCH ON IRRATIONAL BEHAVIORS OF INDIVIDUAL INVESTORS IN VIETNAM STOCK MARKET Student’s name: Dao Le Trang Anh Nguyen Susan Class: Advanced Program – Intake 50 Supervisor: M.A Nguyen Duc Hien Hanoi, 06/2012 ACKNOWLEDGEMENT Our dissertation would not be possible without the enthusiastic help of several individuals who in one way or another guided and supported us from preparation to completion of the study First of all, we would like to send our warm thanks to professors and all of staff members of Advanced Educational Program who always follow our research step by step to give us supports as needed Especially, we would like to express our utmost gratitude to our beloved instructor – Master in Finance Nguyen Duc Hien for his valuable and inspirational instruction despite his extremely busy working schedule We also would like to send our special thanks to people who work for trading floors or securities companies for their enthusiasm and supports as we implemented our survey in their work: Mr Quach Manh Hao – deputy director of Thang Long securities company Mr Hung – Vice head of department of Foreign Trade securities company Mr Tu – Director of Viet Dragon securities company Mr Trung – analyst and broker of An Binh securities company And other brokers at stock exchanges in Hanoi Last but not least, we would like to give our thanks from bottom of our hearts to individual investors, who not know who we are, but still spend their little time on answering our surveys, for us to be able to complete the interesting research TABLE OF CONTENTS ABSTRACT CHAPTER 1: INTRODUCTION Rationale Background of Vietnam stock market Research objectives Research questions Significance of Research Research scope .10 CHAPTER 2: LITERATURE REVIEW 11 Standard Finance 11 1.1 Four Pillars of Standard Finance’s Model 11 1.2 Standard Finance Approach 16 1.3 Input Elements of Standard Finance 16 1.4 Limitation of Standard Finance 16 Behavioral Finance 17 2.1 Introduction of Prospect Theory 17 2.2 Behavioral finance .22 CHAPTER 3: METHODOLOGY 28 Data source .28 Questionnaire design 28 Sampling .32 Analyzing process 33 CHAPTER 4: DATA ANALYSIS AND FINDINGS 37 PART I: PROSPECT THEORY TESTING FOR INDIVIDUAL INVESTORS IN VIETNAM STOCK MARKET 37 Overview of individual investors in Vietnam stock market .37 Prospect theory testing in Vietnam stock market .41 PART II: BEHAVIORAL BIASES OF INDIVIDUAL INVESTORS IN VIETNAM STOCK MARKET 43 Behavioral Biases’ Frequency and One-sample T Test 43 The influence of personal factors on individual investors’ behaviors 50 Explanatory Factor Analysis (EFA) 56 CHAPTER 5: RECOMMENDATIONS 64 CHAPTER 6: CONCLUSION 68 APPENDIX: QUESTIONNAIRE REFERENCES 74 70 ABSTRACT If standard finance assumes that investors are rational, behavioral finance defines those people as normal ones If the former provides investors with techniques to maximize investment profits, then, the later discovers characteristics inside investors to help them avoid cognitive errors, which may cause financial losses Therefore, standard finance and behavioral finance supplement each other However, while standard finance has developed for a long period of time, behavioral finance is still a new concept for many investors all over the world In Vietnam, behavioral finance has just been introduced in recent years The most popular bias, which people can easily realize in Vietnam, is herding behavior For example, in 2006 - the booming year of Vietnam stock market, it was likely that everyone jumped in stock investment However, the root of behavioral finance as well as various biases in current Vietnam stock market has not been studied thoroughly Therefore, this research focuses on proving existence of cognitive errors and finding behavioral biases of individual investors in current Vietnam stock market Surveys are distributed to individual investors to get the primary source After analyzing answers of 231 individual investors in the market by running SPSS to calculate frequencies and apply explanatory factor analysis, the authors provide an overview of Vietnamese individual investors’ behavior In general, they are subject to prospect theory, and among other biases, the most common ones in Vietnam stock market are overconfidence, over optimism, herding behavior, and seasonality CHAPTER 1: INTRODUCTION Rationale In the late sixteenth century, there was a story of investment that shook all of the market and the investors - the story about tulip bulbs In 1593, tulip bulbs were firstly introduced from Constantinople to Holland by a man named Conrad Guestner Because of its beauty and difficulty to obtain, tulip became an instant status symbol for Dutch elite Realizing the profit-making chance in the adoration of tulip buyers, speculators soon joined the market Even to Dutch middle class, the obsession with owning tulips was so big that they were ready to sell everything they owned like their homes, live-stock or other essentials to acquire tulips At that point of time, they expected that the bulbs’ value would continue to grow Because of that expectation, the price of a single bulb at the peak of tulips frenzy reached to the equivalent price of several tons of grain, a major item of furniture or a breeding stock of pigs In 1636, all the tulip bulbs had very high price Even foreign traders jumped into the market and speculated Later on, however, in 1637, when the first speculators began to liquidate their tulips, the tulip prices dropped quickly They lost about 90% in value within only one month As a result, a lot of investors had to incur huge losses The story above is just one of the most typical investing stories about economic bubbles in history Not only did they happen in tulip bulb market, economic bubbles also occurred in real estate market (Real estate in Florida bubble), and especially in stock markets (South Sea bubble, Great Depression in America, dotcom bubble, etc.) So, besides the speculation, it is questioned if there are any other factors creating the bubbles in the markets If the answer to the question above is “No”, then, it leads to the discussion about the bubbles in stock market, the place having the biggest number of bubbles in the history Since the emergence of stock markets, investors and financial analysts have developed various numerical techniques to evaluate and forecast value of the stocks Those techniques belong to standard finance, which is based on an assumption that investors are rational and market is efficient Therefore, if investors are totally rational, and market is really efficient, only speculation cannot create bubbles in the market Then, why bubbles in stock markets still happened After the Nobel Prize in Economics of Daniel Kahneman for his study of Prospect Theory in 2002, behavioral finance became popular among financial practitioners and academics Behavioral finance is a science that involves sentimental factors in finance While standard finance assumes investors are rational, behavioral finance simply considers investors as normal people Many biases of investors were discovered and named afterward: over confidence, over reaction, mental accounting, herding behavior, and so on People then could comprehend that the over expectation to the potent of market and the herding behaviors of investors are the main causes of bubble in the market and push market up far away from their true value In other cases, irrational behaviors of investors can make stock price up and down abnormally Together with bias discoveries, suggestions to solve those biases have been also developed by the economists to help investors enhance their investment returns Although behavioral finance has grown approximately 40 years and developed worldwide, it is still a fresh field in Vietnam Therefore, the topic about behavioral finance drives this research to supply deeper look into behavior of Vietnamese individual investors In this research, the main focus lays on detecting irrational behaviors of individual investors in current Vietnam stock market Background of Vietnam stock market Vietnam stock market officially came into operation since July 20, 2000 with an establishment of Ho Chi Minh Stock Exchange (HOSE) Then, in March 8, 2005, Hanoi Stock Exchange (HNX) was inaugurated From only two companies listed in HOSE in 2000, the number of listed companies in Vietnam stock market at the moment is 682, with 313 companies in HOSE, 396 companies in HNX, and 27 companies in both of two stock exchanges The simple registration procedure and small initial investment requirement are the mains reason for the rapid growth of Vietnam stock market After 12 years of operation, Vietnam stock market has overcome many periods In particular, the period from 2000 to 2005 was start-up stage with modest capitalization, accounting for only around 1% of total GDP However, after booming period in 2006 and 2007, stock market capitalization came up to 43% of GDP Then, due to the difficulties in both domestic and global economy, together with the collapse of stock market bubble, stock market capitalization dropped to 18% in 2008 In 2009, a recovery from macroeconomics helped to raise stock market capitalization to 37.7% of total GDP That number in 2010 was 40% Nevertheless, 2011 was a difficult year for Vietnam economy in general and for Vietnam stock market in particular Due to high inflation, the government simultaneously tightened monetary policy and reduced public spending Therefore, Vietnam stock market was strongly affected with the market capitalization decreased to around 20% of total GDP at the end of the year At the moment, after the first quarter of 2012 with positive signals from inflation-reduction efforts of the government, Vietnam stock market is having slight recovery in term of both capitalization and liquidity In the past 12 years, people have witnessed Vietnam stock market’s abnormal up and down of stock price For example, in the 2006 bubble, price of every stock went up In contrast, in 2011, this went down, no matter how the business performances of companies were Theoretically, stock price depends only on available information in the market Hence, in the economic conditions and operating information of companies in 2006 or 2011, those abnormal movements of Vietnamese stock market may be the consequences of psychological factors of investors in market Research objectives Investors in Vietnam stock market are currently having much more experiences than 12 years ago Back to 2006, at the peak of the bubble, investors in the market were various in terms of occupation, age, education, etc Referring to that period, it may lead to a quick conclusion that a characteristic of Vietnam stock market was herding behavior of investors However, after the collapse of the bubble, the active participants in Vietnam stock market were adjusted That means, over the time, the characteristics of investors in the market have changed In this research, the main objective is to have a look into cognitive errors of individual investors in Vietnam stock market After detecting common biases among Vietnamese individual investors and relationship of those biases with personal factors of each investor, this study provides recommendations for investors so that they can adjust their irrational behaviors and enhance investment results Research questions In this research, the following questions are going to be answered: Is prospect theory applicable for individual investors in Vietnam stock market? Do behavioral biases exist in Vietnam stock market? If yes, what are those biases? How is the relationship between those biases and personal factors of individual investors? Significance of Research Behavioral finance is popular among financial practitioners and academics all over the world with a lot of discoveries about investors’ biases However, in Vietnam, this science is still new People mostly think of herding behavior when behavior of investors in Vietnam stock market is mentioned This research will provide broader and more systematic view about behavior of individual investors in current Vietnam stock market Not only concerning about herding behavior, the research also examine other biases, starting from prospect theory of Daniel Kahneman 10 to biases such as overconfidence, over optimism, representativeness, loss aversion, regret aversion, and seasonality Therefore, together with standard finance, individual investors in Vietnam stock market can also use our findings to apply in their investment Research scope According to previous researches in the world, there has been no evidence showing the differences in behavior of investors due to geography Therefore, there would be no intention of implementing this research nationwide, and processing it at stock exchanges in Hanoi only Moreover, this work concentrates on finding out cognitive errors of individual investors in Vietnam stock market, so the methodology to collect information is primary source ... lays on detecting irrational behaviors of individual investors in current Vietnam stock market Background of Vietnam stock market Vietnam stock market officially came into operation since July 20,... FINDINGS 37 PART I: PROSPECT THEORY TESTING FOR INDIVIDUAL INVESTORS IN VIETNAM STOCK MARKET 37 Overview of individual investors in Vietnam stock market .37 Prospect theory testing... characteristics of investors in the market have changed In this research, the main objective is to have a look into cognitive errors of individual investors in Vietnam stock market After detecting common