Master Thesis Psychology Factors Influencing Investment Decision and Investment Performance: A Study on Individual Investors in Vietnam Ho Minh Phuc Mbus 3.Tran ACKNOWLEDGEMENT First of all, this thesis appears in its current form due to the assistance and guidance of several people. I would therefore like to offer my sincere thanks to all of them who made this thesis possible and an unforgettable experience for my studying. Furthermore, I want to express my deep thanks to my supervisor, Dr. Tran Phuong Thao for the trust, the insightful discussion, offering valuable advice, for her support during the whole period of the study, and especially for her patience and guidance during the time of researching and writing of the thesis process.
Besides my supervisor, I would also like to thank the ISB research committee for their encouragement, insightful comments in my study. Last but not the least, I would like to thank my family for their material and spiritual support in all aspects of my study. Ho Chi Minh City, December 1st, 2014 HO MINH PHUC ` December, 2014 TABLE OF CONTENTS ACKNOWLEDGEMENT. iii LIST OF FIGURE.
iv LIST OF TABLE. iv CHAPTER 1: INTRODUCTION .1 Background of the research .3 Research Objectives and Questions .6 CHAPTER 2: LITERATURE REVIEW, HYPOTHESES AND CONCEPTUAL MODEL .1 Theoretical background on psychology factors .2 An overview of psychology factors on the stock market .1 Psychology factors and investment decisions .2 Investment decision and investment performance .26 CHAPTER 3: RESEARCH METHODOLOGY .2 Measurement of variables .2 Data analysis method.35 CHAPTER 4: EMPIRICAL RESULTS .2 Reliability Test using Cronbach’s Alpha.4 Testing for regression assumptions .1 Influences of Psychology Factors on the Individual Investment Decision .2 Influences of the investment decision on the Individual Investment Performance.49 CHAPTER 5: CONCLUSION, IMPLICATIONS AND DIRECTION FOR FURTHER STUDIES. 1 Key findings of the thesis .2 Managerial Implication of the study .3 Limitation and direction for further studies .3: Cronbach’s Alpha Test for items of factors .4: Factor analysis for psychology variables and investment performance .5: Testing for regression assumptions .81 ii ` ABSTRACT The aim of this thesis is to investigate and determine the relationship between psychology factors including overconfidence, excessive optimism, herding behavior and risk attitude which influence investment decision and investment performance of the individual investors in Vietnam. This research model was developed by different author who suggested various behavioral factors which may affect the investors‟ decision-making process and the investment performance such as Bondt (1985), Odean (1999), Bikhchandani and Sharma (2001)… Specifically, the thesis employs a survey approach by distributing questionnaire in Ho Chi Minh City stock exchange.
Sample size of this research is 200 respondents. The 7-point measurements are tested for their consistency and reliability by Factor Analysis and Cronbach‟s Alpha, which prove that behavioral finance can be used for Vietnam stock market. The findings indicated that, three of four factors have direct effects on investment decisions, in which they explained 63.1% of the variance of investment performance of respondents. With the method analysis of exploratory factor analysis, the research shows that the strong relationship between psychology factors.
Future researches are encouraged to improve the financial knowledge scale to get better and accurate results. Despite of some limitations, this study also has some significations for individual investors, financial education institutions or government agency. Discussion and implications of the findings are delineated at the end of the study. iii ` LIST OF FIGURE Firgure 1.1 The movement of VN Index from 2000 to 6/2014 ……….1: Prospect Theory…………………………………………………………11 Firgure 2.28 LIST OF TABLE Table 3.3: Cronbach‟s Alpha Reliability Coefficient…………………………….0: Number of questionnaires of 8 securities companies in Ho Chi Minh City.2: Cronbach‟s Alpha Test for items of factors.3: KMO and Bartlett‟s Test.6: Regression testing of psychology factor and the investment decisions….7: Summary of the relationship between psychological factors and investment decisions 47 Table 4.8: Regression testing of investment decisions and investment performance .9: Summary of the relationship between investment decision and investment performance……………………………………………………………………………50 iv ` CHAPTER 1: INTRODUCTION This chapter introduces the background of the behavior finance as well as the status of psychology factors.
After that, problem statement is discussed in Vietnamese stock market to have the general picture about the stock market. The research questions and objectives are proposed to explore the factors determining investment decision and investment performance. Based on these, research scope is proposed and thesis structure is presented.1 Background of the research Theories of human behavior from psychology, sociology, and anthropology have motivated much recent empirical research on the behavior of financial markets. They attempts to explain human behaviors‟ in markets, importing theories of human behavior from the social sciences (Shiller, 1999) to explain why and how financial markets might be inefficient (Sewell, 2007).
It could be seen that the term “behavioral finance” has been emerged since 1896 when le Bon (1896) wrote a book “The Crowd: A Study of the Popular Mind”. It is one of the greatest and most influential books of social psychology ever written. Later, the second-most cited paper ever to appear in Econometrical in 1979, the prestigious academic journal of economics, was written by two psychologists Kahneman and Tversky who proposed the prospect theory (Kahneman and Tversky 1979). Then, Plous (1993) wrote The Psychology of Judgment and Decision Making which gives a comprehensive introduction to the field with a strong focus on the social aspects of decision making processes.
A wide range of behavior is taken into account when investigating investor psychology in finance. Tversky and Kahneman (1994) confirmed a distinctive fourfold pattern of risk attitudes: risk aversion for gains and risk seeking for losses of high probability; risk seeking for gains and risk aversion for losses of low probability. Later, Odean (1999) demonstrated that overall trading volume in equity markets is excessive, and one possible explanation is overconfidence. He also found evidence of the disposition effect which leads to profitable stocks being sold too soon and losing stocks being held for too long.
Psychological research has established that men are more prone to overconfidence than women (especially in male- 1 ` dominated areas such as finance) whilst theoretical models predict that overconfident investors trade excessively. Barber and Odean (2001) found that men trade 45 percent more than women and thereby reduce their returns more so than do women and conclude that this is due to overconfidence. In recent years, behavioral finance issues are widely studying. Under the light of behavioral finance, investors can be affected by psychological factors (emotional and cognitive factors) which are the so-called behavioral biases in their decision-making process.
Behavioral biases are abstractly defined the same way as systematic errors in judgment (Pompian, 2006). In fact, many phenomenon and individual investor‟s behaviors in the Vietnamese stock market cannot be explained by standard finance, which based on the efficient market hypothesis. Through the studies, it is found that there are a great number of psychological factors having a significant influence on the behavior of investors. Among them, four common psychological factors that exist in almost every human being are (1) overconfidence, (2) excessive optimism, (3) attitude towards risk and (4) herd behavior.
Up to now, there have been numerous studies related to these above psychological forms of individual investors in the world such as as Debond (1985), Odean (1999); Bikhchandani and Sharma (2001). A study by Lakonishok, Shleifer and Vishny (1994) postulate that value strategies produce superior returns because of investors consistently overestimate future growth rates of glamour stocks relative to value stocks. The essence of this argument is that investors are excessively optimistic about value (glamour) stocks because they tie their expectations of future growth in earnings to past bad (good) earnings. Prior studies shows that behavioral finance studies have been carried out popularly in developed markets of Europe and the United States (Caparrelli, Arcangelis & Cassuto, 2004, p.222–230) as well as in emerging and frontier markets (Lai, 2001, p.210–215 ; Waweru et al.
Among these studies, Odean (2001) indicates behavior factors existing in developed markets while using behavioral finance for frontier and emerging markets is much fewer than for developed markets (Waweru et al. As such, understanding behavioral factors particularly psychology factors are important in emerging markets like Vietnam. 2 ` With the development of the science, technology and the economy, it is possible to consider stock market as the yardstick for economic strength and development. Therefore, the movement of stock market trend represents the economic health of an economy.
The development of theories and models is try to attempt and explain the way how stock price goes up and down. From the developed stock markets such as the USA, the UK, Japan. which have strong impacts on global security markets (Reza, Zamri & Tajul, 2009) to the emerging and the frontier or pre emerging such as Vietnam, Kenya, the psychology of human being is complicated and cannot be predicted. From that, researchers and investors show that to understand people‟ activities and behavior or psychology factors is necessary.2 Problem Statement In Vietnam, there are two stock exchanges.
The first Vietnamese stock exchange, known as the Ho Chi Minh Stock Trading Center (HOSTC) has been launched since 2000 and the second, known as the Ha Noi Stock Trading Center (HASTC) has been established since 2005. At the beginning, the market size was quite small and thin with only 2 listed companies and 4 security companies; however, the market has been developed significantly in recent years. By December 2013, there were more than 300 listed companies on the Ho Chi Minh Stock Exchange (HOSE), the later name of the HOSTC, with market value was 949,000 billion VND, increased 184,000 billion VND in comparison with 2012, accounting for approximately 31% GDP. In addition, the second stock Exchange also had significant growth as given in Huong (2014).
Between the two markets, the Ho Chi Minh stock market has been developed significantly in the number of listed stocks and transaction value for 14 years (Mieu, 2014), the price movement seems to fluctuate unpredictably over different periods (Graph 1. However, this market index is often used for doing research and studying in Vietnam such as Ly (2010), Chi (2007).1 The movement of VN Index from 2000 to 6/2014 It is commonly known that a stock market is efficient when price of the stocks is reflected by information of the economy and the enterprises. However, the story in Vietnamese stock market is different. In fact, in some the periods of time, the aggregate market index of HOSE, VNIndex, increased significantly although no good information had been informed.
In contract, VNIndex went down dramatically in spite of no bad information. Some author used behavior finance to explain behavior of the investors such as Chi (2007), Tho and Tuan (2007), and Ly (2010), etc. These studies, however, have mainly focused on explaining the market behavior. Additionally, different investment environment may affect the psychology of investors unalike.
In fact, the Vietnamese stock market widely differs from that of other countries in the region as well as in over the world. According to Yates et al., (1997), cultural difference, more specifically, life experiences and education, can affect behaviors when they found some evidences that Asian people exhibit more behavioral biases than people raised in Western countries or the United States. Similarly, when comparing between Western cultures and Asian ones, Kim & Nofsinger (2008) show that the existence of culture differences can affect the behaviors and decisions on investment. Thus, psychology factors of individual investors in Vietnam may also differ from those of other markets.
In the literature, research associated with investors in Vietnam may be considered as in the initial stages of development in research; therefore, there is a need to study and understand the behavioral factors in order to identify the biases affecting their investment and effects on the investment performance of individual investors. On the other hand, previous researches for this 4 ` topic in Vietnam are so limited and narrow (Ly, 2010).