Research Objective The Dissertation "The investor behavior on the Vietnamese stock market" focuses on clarifying six main issues related to the behavior of individual investors on the
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INTRODUCTION
1 Imperativeness of the thesis
The Vietnamese stock market was officially put into operation over 12 years ago During the period, the market has gone through ups and downs, reflected by the volatility of the VN-Index
Volatility of the Vietnamese stock market over the past time illustrates the necessity of studying investor behavior The evidence of market "bubbles" or excessive drops in share prices have shown that investors do not always act wisely and smartly as expected The standard finance theories were unable to explain unexpected fluctuations of the Vietnamese stock market over the past time
In addition, the study of investor behavior on the basis of behavioral finance theory will help securities market management agencies and regulators to deploy reasonable management policies at the right time to ensure the sustainable development of the market
Behavioral finance is developed by incorporating psychology into finance It was almost 100 years since French psychologist Gabriel Tarde started researches on the application of psychology in economic science in the 1880s until the application of psychology in finance made significant progress in the 1980s Fundamental works by Amos Tversky and 2002 Economics Nobel winner Daniel Kahneman (1979), Richard H.Thaler (1985) and especially Robert Shiller with his well-known book "Irrational Exuberance" (2000), which accurately predicted the collapse of the global stock market soon after, created a turning point for the studies of behavioral finance
Although behavioral finance started only over two decades ago, the theory has made an important contribution to explaining the acts different from "rational expectations", the behavioral biases of investors and "herding" investments in the commodity market, the stock market or the monetary market Behavioral finance contributes to explaining the "bubble" phenomenon on these markets, especially in emerging markets like the Vietnamese stock market Furthermore, behavioral finance theory can offer scientific bases for adjusting pricing models (including securities
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andderivatives pricing models, etc.); for being applied in corporate governance theories or for explaining the interaction among different markets
2 Research Objective
The Dissertation "The investor behavior on the Vietnamese stock market"
focuses on clarifying six main issues related to the behavior of individual investors on the Vietnamese stock market as follows:
(1) Explore and measure the determinants of individual investor behavior on the stock market;
(2) Explore the factors that influence individual investor behavior;
(3) Clarify the impact of psychological factors on individual investor behavior; (4) Clarify the relationship between education level and transaction scale with investment efficiency;
(5) Clarify the availability effect and behavioral biases of individual investors on the Vietnamese stock market; Demonstrate that individual investors on the Vietnamese stock market are “irrational” and do not follow the prospect theory;
(6) Explore the herd mentality on the Vietnamese stock market
3 Object and scope of the study
The object of the study is the behavior of individual investors on the Vietnamese stock market The Dissertation studies individual investor behavior via questionnaires to 500 individual investors on the Vietnamese stock market
In addition to the questionnaire, the Dissertation uses the trading results of the 2,300 accounts of individual investors with over 100,000 orders to analyze and examine the behavior of individual investors
The scope of the Dissertation is limited to the behavior of individual investors
4 Fundamental theoretical framework
Prospect Theory developed by Kahneman and Tversky (1979, 2000),an important work that helped Kahneman win the Nobel Prize in 2002,was used as the theoretical foundation for the Dissertation
Trang 3Hypothesis 4: Age of investorshas positive correlation with psychological elements: optimism and confidence; while it has negative correlation with psychological elements: pessimism, attitude towards risks and herding mentality
Hypothesis 5: The relationship between education level and other measures related to investor behavior:
Hypothesis 6: The relationship between the age of investors and other measures related to individual investor behavior:
Hypothesis 7: Male investors are usually more confident and more effective in securities investments than female counterparts
Hypothesis 8: Education level raises the profitability ratio, whereas average total investment reduces the profitability ratio Education level has larger impact on profitability than total investments
Hypothesis 9: Elements of fundamental analysis of securities investment (macro analysis, industry analysis, company analysis) affect the decisions of individual investors
Hypothesis 10: There isempirical rule effects(heuristic) in the behavior of individual investors
Hypothesis 11: Account distribution effectexists in the behavior of individual investors
Hypothesis 12: Herd mentality exists in individual investor behavior
* Academic and theoretical contributions
Based on about 100 researches on behavioral finance, the Dissertation focuses on clarifying the theoretical foundation on individual investor behavior on the stock market according to behavioral finance approach Academically, theoretical contributions of the Dissertationare presentedin the following main aspects:
1 Constructing the main themes (main contents) of individual investor behavior according to behavioral finance approach
2 Create a link between the theory on testing individual investor behavior via questionnaire and testing of individual investor behavior through real trading results on investor accounts
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* Findings and recommendations drawn from the research results
(1) The Dissertation finds quantitative evidence to show that individual investors on the Vietnamese stock market are irrational and have behavioral biases Therefore, standard finance theoriesare unable to explain the behavioral biases of investors TheDissertation then recommends changinga number of policies related to the management and operation of the stock market such asspecifying price fluctuation magnitude, banning short selling transactions, regulatingand controlling information disclosure
(2) The Dissertation develops a model to measure behaviors of individual investors withfivegroups of psychological factors and 19 attributes: (1) Overoptimism; (2) Herding mentality; (3) Overconfidence; (4) Risk aversion; and (5) Pessimism The Dissertation then recommends that Vietnam should develop a set of indicators to measure Sentiment Index, in addition to other quantitative indicators such as VN30, HNX30 and VIR50
(3) From the research results, the Dissertationsuggests merging two stock exchanges into one single Exchange in the near future and proposes measures to limit the mechanisms creating conditions for the development of behavioral biases of investors to avoid wasting and to fit inthe trend of international integration The Dissertation also emphasizes thenecessitytoform and develop the derivative stock market in the near future
(4) The Dissertation findsquantitative evidence about the relationship between age and education level with groupsof psychological factors The Dissertationaffirms the importance ofraising the investors’ competence and knowledge of behavioral finance to limit distortions and ensure sustainable development of the stock market
(5) The Dissertation findsquantitative evidence about behavioral biases of individual investors such as extraposition bias, disposition effect, herding bias, etc
(6) From the research results, the Dissertation confirms that there arefour groups of factors related to the macroeconomic environment and the stock market (18 attributes), five groups of factors related to listed securities (26 attributes) and four groups of factors related to investors themselves (12 attributes), affecting the decision-making process of individual investors This is the basis for renewing the criteria forinformation disclosure regulation of the SSC The Dissertationdemonstratesthat inflation is not a factor reallyinfluencing the decisions of individual investors (contrary to current assessments)
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CHAPTER 1 RATIONALE FOR INDIVIDUAL INVESTOR BEHAVIOR
ON THE STOCK MARKET ACCORDING TO
BEHAVIORAL FINANCE 1.1 Overview of individual investor behavior on the stock market
Individual investors are those who have temporary idle funds andmake investmentson their own accounts in order to achieve personal financial goals Individual investors often have little capital, no long-term investment strategy; do not follow specific investment philosophy; are vulnerable and easily get hurt Therefore, investment decisions of individual investors are often made quickly
The behavior of individual investors are affected by both internal and external
factors Internal factors include cognitive capability; gender; age; personal feelings;and mood External factors includeeconomic factors; socio-political and cultural factors;
1.2 Behavior of individual investors on the stock market according to behavioral finance approach
1.2.1 Formulation and development of behavioral finance
Pillars of standardinvestment financetheories, such as Arbitrage theory by Merton Miller and Franco Modigliani; Modern portfolio theory by Harry Markowitz (1990 Nobel winner); Capital asset pricing model (CAPM) by John Lintner and William Sharpe (1990 Nobel winner) and Option pricing theory by Fischer Black, Myron
Scholes and Robert Merton (1997 Nobelwinner) were all based on the assumption that investorswererational However, reality proved that standard financetheories
and models were unable to explain the stock market bubbles and crisis in the world and in Vietnamover the past years Behavioral finance theories, with the basisstated
that "the market is not always efficient" and "investors are irrational", have shaken
the "efficient market" theory, the foundation of standardfinance theoriesover the pastfive decades
Behavioral finance theory is developedby incorporating psychology into finance, a relatively late development It was almost 100 years since French
psychologist Gabriel Tarde started researches on the application of psychology in economic science in the 1880s until the application of psychology in finance madesignificant progressin the 1980s (Though studies by George Kanotahad laid the foundation for behavioral finance with an important term "expectation" in the 1930s and 1940s, his workswere quite limited) Fundamental worksby Amos Tversky and Daniel Kahneman (1979), Richard H.Thaler (1985) and especially Robert Shiller with hiswell-known book "Irrational Exuberance" (2000), which accurately predicted the collapse of the global stock markets soon after, urged behavioral finance researchers to
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constantly conduct new studies There was an important researchin 1993 byJegadeesh and Titman onmomentum effect, which remained a challenge for "efficient market" advocates There weremanyversions proposing toutilize this effect to make outstanding profits with low risks (The latest version was the study bySagi and Seasholes announced in 2007 with the results that could not have beenexplained by the efficient market model; risk and return or arbitrage trading theories
Behavioral finance is a relatively new field; yet it is developing rapidly By incorporating theories of psychological formulation with classical finance and economics, behavioral finance is the key to explaineconomic decisions Previously, the studies of behavioral finance were not thoroughly carried out,as it was believed that an investor only needed to observe how others traded and then followed them It was considered as the basis for trading decisions The study of behavioral finance candemonstrate that trading activitiesare based on investor behavior, either in the form
of individual or collective For example, behavioral finance helps to explain the causes and manifestations of inefficient market operations Although behavioral finance remains a controversial field fortraditional finance researchers, it is gradually assertingits key position in today's financial trends
1.2.2 Fundamental theories of behavioral finance
- Prospect theory
American Psychologist Professor Daniel Kahnemanwon the Nobel Prize in Economics for his work on behavioral finance and "prospect theory", creating a solid foundation for the developement of behavioral finance Prospect Theory developed by Daniel Kahneman and Tversky (1979) andits adjusted version namedCumulative Prospect Theory by Tversky and Daniel Kahneman (1992) are considered as perfect supplements to Expected Utility Theory Prospect Theory provides a model for making decisionsbetween alternatives that involve risk, where the probabilities of outcomes are known.The value function in Prospect Theory replaces utility function in Expected Utility Theory While utility is often quantified in terms of income,the value is determined by gains and losses compared with a reference point Three main observed features of human decision-making process requires certain characteristics of the value
function: Humans are risk averse in gains and risk seeking in losses, which means the value function is convex with positive values and concave with the negatives A decision is made by paying attention to the gains and losses, i.e the point of the value function is not income, but the change in income, and people do not like losses Therefore, the value function for the lossesis steeper than for the gains
The value function built by Kahneman and Tversky (1974) differed from the expected utility functionas the value function hada reference point or personal comparison point (a measure of targeted wealth) determined by the subjective impression
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- Irrational Mental Accounting
To study irrational accounting, researchers of behavioral finance organize to study behavioral finance in the context of no risks Mental accounting is a method that people use to manage decision-making process more easily According to Richard
Thaler (2005), "Mental accounting is the set of cognitive operations used by individuals and households to organize, evaluate and keep track of financial activities." The determinants of mental accounting include accounts classifying, closing, and evaluating
- Narrow Framing
A frame is determined by human presentation, perception aboutthe question and characteristics of each person If the decision of an individual changessimply due to changes in the frame, the Expected utility theory does not work as it assumes people make consistent choices, regardless of how the problems are presented
1.2.3 Individual investor behavior according to behavioral finance approach
1.2.3.1 Heuristics and biases
Empirical rules, also known as the "rule of thumb",are methods to minimize search fornecessary information to come up with a solution to a problem These are the
"shortcuts", simplifying the methods to estimate probability and value that are commonly done to make decisions and reducing computational complexity Empirical rules provide very convincing subjective approaches, but reflect the fact that human assessment of risk and possibility often fails to comply with probability theories accurately
This part of the Dissertation focuses on three types of empirical rules
introduced by Kahneman, Slovic, and Tversky (1982) and Slovic et al (2002): representativeness, availability, anchoring and adjustment
1.2.3.2 Behavioral biases
Hirshleifer (2001)claimed that the majority of behavioral biases of investors are the results offour main groups of reasons: self – deception; heuristic simplification; emotion; and social interaction
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Loss aversion will urge investors to grasp securities with prices on the fall as they aim to wait for share prices to bounce up before proceeding with their trading However, lack of assertiveness will drive such investors to greater losses
- Over-optimism Bias
Most people tend to assess themselves as superior to the average and investors are no exceptions Investors are often overly optimistic about the market, economic system and potential investments
- Illusion of Control Bias
The illusion of control describes investors who think they can use reasoning and emotion to control or at least affect investment results, but in fact, they cannot
- Self Attribution Bias
Aself-attribution bias or self-serving bias or a self-serving attributional bias refers to individuals attributing their successes to internal or personal factors such as
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Once an event passes, people affected by this psychological effect tend to realize that they can predict an event, even when it is unpredictable
- Cognitive Disonance Bias
When people receive new information opposing to their previous understandings, they often experience emotional discomfort - the psychological phenomenon known as cognitive disonance
- Conservatism Bias
Conservative ideology is a human psychological process related to the admiration of past predictions and lack of access to new information
- Representativeness Bias
The bias is often described simply as the tendency of not paying much attention
to long-term factors, but being more interested in typical short-term situations
- Anchoring/Salience Bias
When people need to estimate a value with an unknown magnitude, they begin byfiguring out a few initial estimates and defaults - a "trusted source" - that they then adjust up or down according to information and analysis
- Availability Bias
Availabilitybias occursas people easily recall available rules in their memory The importance of rules depends on the contentsthemselves Availability bias can lead people to overestimate the probability of a public event or serious event, especially newones
- Emotion/Affect
Emotion and unconscious needs of human beings, imagination or fear will control many decision-making behaviors of investors
The main effectsstudied by psychoanalytic researchers include:
Paranoid personality disorder
Narcissistic personality disorder
Depressed personality disorder
Self control
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CHAPTER 2 RESEARCH METHODOLOGYANDDATA 2.1 Research methodology and data on individual investor behavior through questionnairesaccording to behavioral finance approach
2.1.1 Research methodology
The Dissertation author conducted a survey and analyzed data from a survey of individual investors on the Vietnamese Stock Market with a questionnaire including
35 questions to clarify the following issues about behaviors of individual investors:
Firstly,identify, measure psychological factors and assess the impact of psychological factors on the behavior of individual investors
Besides employing the results in descriptive statistics, the author used other quantitative analysis methods, including: Exploratory Factor Analysis (EFA), regression analysis and confirmatory factor analysis by deploying exploratory factor analysisfor the second time
Exploratory Factor Analysis (EFA): is an analytical method, which helps to identify aspects or factors explaining the correlationsamong a set of variables
Confirmatory Factor Analysis by deploying EFA for the second time is used to test how well the observed variables represent factors, how well the scale of factors is developed as well as to assess the degree of fitness of the model
Secondly, identify whether or not individual investors on the Vietnamese stock market are "rational"?Whether they follow the Prospect Theory?
To conclude whether individual investors on the Vietnamese stock market are rational or not and whether they follow the Prospect Theory, the author will analyze the answers of investors according to theoretical contents addressed in Chapter 1 of the Dissertation
Thirdly, clarify the basis for investment decisions of individual investors on the Vietnamese stock market
Through EFA test, the author will explore factors that affect investment decision-making behaviors of individual investors on the Vietnamese stock market The factors will be divided into groups according to fundamental analysis process in stock investments, including:
- Group of factors related to macro and stock market
- Group of factors related to listed securities
- Group of factors related to stock investors themselves
Fourthly, identify the relationship between education and age with psychological elements representing behaviors of individual investors on the Vietnamese stock market
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The Dissertation uses regression methods to measure the relationship between variables related to investors’ behavior:
- Clarify the relationship between education and groups of psychological factors
- Clarify the relationship between age and groups of psychological factors
- Clarify the relationship between education and related scales
- Clarify the relationship between age of the investors and related scales
- Clarify the relationship between gender and performance in securities investments
Fifthly,test the relationship between education level and the average size of investment accounts with investment efficiency (profit or loss in 2011)
The Dissertation uses Binary Logistic model to test the relationship between investment efficiency with education level and size of investment accounts Binary Logistic regression model employsabinary dependent variable (investment efficiency)
to estimate the probabilities for the information of independent variables (education level and size of investment accounts ofindividual investors)
2.1.2 Research data
The author organized to survey and interview 525 individual investors on the Vietnamese stock market according to the questionnaire (Appendix 1) Of the total, 25 answer sheets, which did not contain sufficiently reliable information, were excluded from the sample The sample size, therefore, included 500 individual investors
2.2 Research methodology and data on individual investor behavior based on trading resultsaccording to behavioral finance approach
For the first test, the Dissertationchecks the profitability of the sharesbeingsold
and purchased after a specific period If sold stocks bring better profitability than the purchased shares, investors areirrational and make mistakesintheir investment decisions In addition, the Dissertationuses a logistic regression model to estimate the rate of making bad investment decisions according to investors’ characteristics The secondtestis conducted for a psychological error called "extrapolation bias”, in which
investors simplify historical trends to predict future prospects (heuristic simplification), a form of "representative bias" Investors rely on historicalprofitability
of the shares to make purchase or sale decisions If the test shows that the profitability
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of the stock beforebeingpurchased is greater than zero or the Index, we can conclude that investors decide to buyshareswhose prices increasein the period before their
purchase order In other words, investors make "extrapolation bias" error
b) Portfolio allocation effect
This research is conducted following Odean’s methodology (1998) [109] in detecting ‘portfolio allocation effect’, calculating realized gain/loss ratios If the ratio
of shares with realized gain is higher than that of realized loss, it can be concluded that the investor is having the problem of “portfolio allocation effect’, which is a psychological problem of ‘loss aversion’ phenomenon Then, the logistic regression model is employed to estimate the correlation between ‘portfolio allocation effect’ and the characteristics of the investor Additionally, the research also utilizesthe approach
by Shapira & Venezia (2001) to gauge the average holding time of investors in accordance to the roundtrip of gaining and losing shares If the average holding time in roundtrip of losing share is longer than that gaining share, the investors is having
‘portfolio allocation effect’
2.2.1.2 Approach to study ‘herd behavior’
The model employed in this research is the innovated version of CCK Model – developed by Chang, Cheng and Khorana Another model used to cross check the herd behavior between two stock exchanges is developed based on CCK Model
CCK Model:
CSAD=α+β1*abs(rm)+β2 (rm)^2+ξ
In which: CSAD=Average abs (ri-rm)
CSAD (Cross Sectional Absolute Deviation) is the average dispersion, calculated by the absolute deviation between daily rates of return of stocks in the portfolio and that of the market (the market index)
β1: coefficient of abs (rm) variation – absolute rate of market return
β2: coefficient of (rm) ^2 variation – square ofmarket return
ri: rate of return of ith stock
rm:market return, the daily rates of return represented by HNX Index and VN Index
ξ : random error
2.2.2 Data
2.2.2.1 Data on the available rules effect and the biases in the behavior of individual investors
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1093 accounts with 51,529 successful transaction orders The study is conducted on a large number of accounts with many successful transaction orders to enhance the accuracy and reliability of the result
2.2.2.2 Data on the herd behavior
The data used in this paper is retrieved from the website :
http://www.phutoan.com.vn (PhuToan Research and Investment JSC.) The data on this website includes transaction prices and volumes of all the stock listed on Ho Chi Minh Stock Exchange since their listing date to 21 March 2012 However, the data actually utilized in the study is dated from January 2004, when there were 10 stocks being traded
VN Index, Large Cap Index and Small Cap Index are also incorporated With the aim to calculate the daily rate of return on each stock, this research only uses the closing price of each transaction day