Luận văn thạc sĩ UEH heuristics influencing investment decision making and investment performance,

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

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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.

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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

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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

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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.

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1

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

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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

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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

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