Master Thesis Heuristics influencing decision making and performance: evidence from individual investors in Vietnam Nguyen Thi Thanh Thuy Mbus 3. Tran Phuong Thao TIEU LUAN MOI download : skknchat@gmail.com 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.
TIEU LUAN MOI download : skknchat@gmail.com 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 TIEU LUAN MOI download : skknchat@gmail.com LIST OF FIGURES Figure 2.2 New research model (revised). 27 LIST OF TABLES Table 3.1 Types of measurement for heuristic variables influencing investment decision making .2 Types of measurement for individual investors’ decision making .3 Types of measurement for individual investors’ performance.1 Descriptive statistic of respondent’s characteristics.2 Reliability analysis for each factor .3 Key dimensions, items .4 Correlation among factors .5 Regression analysis - Model summary.7 Regression analysis of variables.9 Regression analysis – Model summary .11 Regression analysis of variables.
49 TIEU LUAN MOI download : skknchat@gmail.com 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, individual investor, decision making, investment performance, Vietnam. TIEU LUAN MOI download : skknchat@gmail.com 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 do 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 1 TIEU LUAN MOI download : skknchat@gmail.
It could be seeing that, heuristics are quite useful in investment decision making (Waweru et al.27), however they may lead to biases (Kahneman & Tversky, 1974, p. 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. 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, 2000.2 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. Recently, the Vietnamese stock market has experienced significant development with regards to the market size and market 2 TIEU LUAN MOI download : skknchat@gmail.
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. 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.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 3 TIEU LUAN MOI download : skknchat@gmail.com positive influence on the investment performance? 1.4 Scope of the research There are several heuristic factors influencing behaviors of investors in stock markets.
In this study, three heuristic factors are taken into account, namely representativeness, availability and overconfidence. There are factors that mentioned in several studies such as the research on overconfidence bias (Glaser and Weber, 2012), the study on representativeness bias (Taffler, 2012) and analysis regarding to the effects of behavioral factors on investment decision making by unit companies in Kenya (Shikuku, 2010) and so on. In this thesis, individual investors are concerned because according to the report of the Wall Street Securities (2014) this group of investors account for over 60 percentages of investors trading in the Vietnamese stock market. In addition, due to the time constraint, the research focuses only on the heuristic behaviors of individual investors studying or working at the Ho Chi Minh City only.
The Ho Chi Minh City is chosen because it is often considered as the biggest economic center of Vietnam and the biggest Vietnamese stock exchange, namely the Ho Chi Minh Stock Exchange, is located there.5 Structure of the thesis This thesis is organizes in five chapters as follow: Chapter 1 is an introduction chapter. This chapter describes an overview of research background, research problem, and objective. Besides, the scope of research, implications, and structure of thesis are also present. Chapter 2 is about presenting previous research done on the stream of studies related to theoretical foundation regarding to explain prospect theory and heuristics theory as well.
Besides, heuristics of individual investors also is presented in detail in the research. More importantly, investment decision making and investment performance of individual investors is clearly explored as well. This chapter is to concentrate on 4 TIEU LUAN MOI download : skknchat@gmail.com explaining each variable in the model, and reasons for choosing them to be included in the research model. Chapter 3 is research methodology chapter.
Firstly, research process is presented in general. Then, research design and sampling are also mentioned regarding to qualitative method and quantitative method as well. After that, the measurement scales apply for the research factors will be determined clearly and suitably. This chapter also defines how to collect data and analyze the data collected to test the research hypotheses proposed in chapter 2.
Finally, research method is explained in detail regarding to Cronbach alpha, Exploratory Factor Analysis and Multiple regression analysis. Chapter 4 is the analysis and discussion chapter. In detail, data background is firstly mentioned and measurement reliability of each factor using Cronbach’s alpha is properly presented as well.