MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HOCHIMINH CITY NGUYEN HAI NAM THE IMPACTS OF BEHAVIORAL FACTORS ON INDIVIDUAL INVESTORS’ DECISION MAKING AT THE HO CHI MINH STOCK EXCHANGE MASTER OF BUSINESS ADMINISTRATION THESIS HoChiMinh City – 2012 MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY NGUYEN HAI NAM THE IMPACTS OF BEHAVIORAL FACTORS ON INDIVIDUAL INVESTORS’ DECISION MAKING AT THE HO CHI MINH STOCK EXCHANGE Major: Major Code: Business Administration 60.34.05 MASTER OF BUSINESS ADMINISTRATION THESIS Supervisor: DR TRAN HA MINH QUAN HoChiMinh City – 2012 ACKNOWLEDGEMENT I would like to express my heartfelt gratitude and deepest appreciation to my research Supervisor, Dr Tran Ha Minh Quan for his intensive support, valuable suggestions, guidance and encouragement during the course of my study I would like to express my sincere gratitude to all of my teachers at Faculty of Business Administration and Postgraduate Faculty, University of Econimics Ho Chi Minh City for their teaching and guidance during my MBA course I would like to express my 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 the interviews and the survey I would like to specially express my thanks to all of my classmates, my friends from for their support and encouragement I would also like to avail this opportunity to express my appreciation to Professor Nguyen Dong Phong, UEH Board of Directors for creating MBA program in English and Dr Tran Ha Minh Quan for his support during the course Finally, I heartily dedicate this study to my beloved parents, my younger brother Duc Vinh, and my wife, Doan Phuong who have encouraged and supported me during my study Page i ABSTRACT This study investigates the impacts of behavioral factors on the investment decisions of individual investors in stock market It applies behavioral finance theory to explore the possible behavioral factors influencing individual investors’ investment decisions then identify the impact levels of those factors using data from respondents of 180 individual investors at the Ho Chi Minh Stock Exchange (HOSE) According to the findings of this study, there are four behavioral factors affecting the investment decisions of individual investors at HOSE: Heuristic, Market, Prospect, and Herding The impacts of four behavioral factors on individual investors’ decision making at HOSE are in varying degrees from high impact to low impact: Market factor has highest impact; Heuristic and Prospect have moderate impact; while Herding factor only has low impact Keywords: “Behavioral finance”, ”Behavioral factors”, “Individual investors’ decision-making”, “Ho Chi Minh Stock Exchange”, “HOSE”, “Vietnam” Page ii CONTENTS Acknowledgement i Abstract ii Contents iii List of Tables v List of Figures vi CHAPTER1: INTRODUCTION 1.1 Research background 1.2 Problem statement 1.3 Research objectives and research questions 1.4 Research scope 1.5 Research structure CHAPTER 2: LITERATURE REVIEW 2.1 Traditional finance theory versus behavioral finance 2.2 Behavioral factors impact the process of investors’ decision-making 2.2.1 Heuristic theory 2.2.2 Prospect theory 12 2.2.3 Market factors 13 2.2.4 Herding effect 15 2.3 Research model 19 CHAPTER 3: RESEARCH METHODOLOGY 21 3.1 Introduction 21 3.2 Research design 22 3.3 Data collection method 23 3.4 Design of Measurements and Questionnaire 25 3.5 Data process and analysis 27 Page iii CHAPTER 4: RESEARCH RESULT AND FINDING DISSCUSSION 30 4.1 Introduction 30 4.2 Characteristic of sample 30 4.3 Measurement Reliability Test using Cronbach’s Alpha 33 4.4 Factor analysis of behavioral variables influencing the individual investment decisions 35 4.5 Impact Levels of Behavioral Factors on the Individual Investors’ Investment Decisions 37 4.6 Finding discussion 41 4.6.1 Impacts of Heuristic Variables 42 4.6.2 Impacts of Prospect Variables 43 4.6.3 Impacts of Market Variables 45 4.6.4 Impacts of Herding Variables 46 CHAPTER 5: CONCLUSION AND RECOMMENDATIONS 47 5.1 Introduction 47 5.2 Conclusions 47 5.3 Contributions of the study 48 5.4 Recommendations for Individual Investors 49 5.5 Limitations and further researches 50 References 52 Appendix 55 Appendix 59 Appendix 61 Page iv LIST OF TABLES Table 2.1: Behavioral factors influencing the investment decision-making 18 Table 3.1: Type of measurements for personal information 25 Table 3.2: Type of measurements for behavioral variables 26 Table 4.1: Sex of respondents 30 Table 4.2: Age of respondents 31 Table 4.3: Time for attending stock market 31 Table 4.4: Attending course of stock exchange 32 Table 4.5: Amount of investment last year 32 Table 4.6: Cronbach’s Alpha Test for items of Factors 34 Table 4.7: Factor analysis (EFA) for behavioral variables 36 Table 4.8: Impacts of variables on investment decision at HOSE 38 Table 4.9: Results of the hypotheses 41 Page v LIST OF FIGURES Figure 2.1: The research model of behavioral factors’ impacts on investment decisions of Individual investors at HOSE 21 Figure 3.1: The research process 22 Page vi CHAPTER INTRODUCTION 1.1 Research background Stock market is a market where stocks are bought and sold (Zuravicky, 2005) It has the important role on the development of an economy It can be considered as the yardstick for economic strength and healthy Stock market is a source of financing investment Besides, stock market also performs a function as a signaling mechanism to managers regarding investment decisions and a catalyst for corporate governance (Supat, 1998) Additionally, stock market may push the development of an economy through efficient allocation of resources and better utilization of resources (Supat, 1998) However, stock market is best known for being the most effective channel for company’s capital raise (Zuravicky, 2005) There are some reasons that make interesting to people when investing in stock market The first reason is because of “long-term growth of capital, dividends, and a hedge against the inflationary erosion of purchasing power” (Zuravicky, 2005) The other reason that makes the stock market more attractive than other types of investment is its liquidity (Bencivenga et al., 1996) Liquidity allows investors to trade stocks easily and quickly while firms still have permanents use of capital for stable development (Bencivenga et al., 1996) Most people invest in stocks because they want to be the owners of the firm, from which they benefit when the company pay dividends or when stock price increases (Zuravicky, 2005) However, many people buy stocks for the purpose of control over the firms Regularly, shareholders need to own specific amount of shares to be in the board of directors who can make strategic decisions and set directions for the firms Page Vietnam stock market, which established from 2000, is still a frontier or pre-emerging market due to the quality of market criteria (FTSE, 2011) In comparison to developed markets (such as the USA, the UK, Japan, EU,…) and emerging markets (such as Mexico, China, India,…), Vietnam stock market appears to be much smaller in terms of scale and maturity However, Vietnam stock market with reprentativeness from Ho Chi Minh Stock Exchange (HOSE) has been developed significantly in both the number of listed stocks and transaction value for 11 years During that period, the price movement at HOSE seems to fluctuate unpredictably In addition, Vietnamese investors’ decisions are still difficult for financial analysts to understand Many comments and recommendations given by security companies or even global financial organizations did not match with what has really happened At the early of 2008, when VN-Index was standing at around 830 points, Yoong, the analysis manager of Mekong Securities was confident to assert that VN-Index would go up to 1140 point in 2008 (Tu, 2008) Publishing the same opinion, HSBC and many security companies affirmed that VN-Index would be likely to reach 1,100 point by the end of 2008 (HSBC, 2007) Belief in the growth of stock market did not help these analysts to save the VN-Index from remarkable declination In a forecast at the early of 2009, HSBC predicted that 2009 would be another difficult year and the Ho Chi Minh stock market would be volatile with some large up and down swings, but end up at the same level as 2008, around 316 points (HSBC, 2009) This forecast is not accurate as at the end of 2009, VN-Index was 1.5 times more than that of 2008 Therefore, it is possible to state that the forecast methods based on the conventional financial theories are not suitable for Ho Chi Minh stock market in this context These theories assume that investors rationally maximize their wealth by following basic financial rules Page ...MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY NGUYEN HAI NAM THE IMPACTS OF BEHAVIORAL FACTORS ON INDIVIDUAL INVESTORS? ?? DECISION MAKING AT THE HO CHI MINH STOCK. .. identify the impact levels of those factors using data from respondents of 180 individual investors at the Ho Chi Minh Stock Exchange (HOSE) According to the findings of this study, there are four behavioral. .. factors affecting the investment decisions of individual investors at HOSE: Heuristic, Market, Prospect, and Herding The impacts of four behavioral factors on individual investors? ?? decision making