MINISTRY OF EDUCATION TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY INTERNATIONAL SCHOOL OF BUSINESS - MASTER THESIS BEHAVIORAL FACTORS AFFECTING INVESTMENT DECISION- MAKING THE CASE OF HO CHI MINH STOCK EXCHANGE (HOSE), VIETNAM Student: Phung Thai Minh Trang Course: MBUS 2.2 Instructor: Dr Dinh Cong Khai Ho Chi Minh City, 2013 ACKNOWLEDGEMENTS This research would not have been possible without the valuable contribution of many people I would like to take this opportunity to express my great gratitude for their understanding, encouragement, and support First, I would like to extend my deepest appreciation to my thesis supervisor, Doctor Dinh Cong Khai, for his numerous valuable comments and suggestions I am very fortunate to have his supervision and his continuous encouragement which has motivated me and gave me confidence to complete this research In addition, I would like to thank all of the directors and lecturers of ISB for providing me a solid foundation of knowledge, which has been not only useful for this research work but also for my future development in my social life and my professional career A special “thank you” to my classmates and friends for providing me with their honest and candid comments on my questionnaire as well as instant support regardless if day or night All of this contributed to the succcess and the quality of the research Furthermore, I want to express my appreciation to the managers and employees working at the Ho Chi Minh Stock Exchange and various securities companies, who helped me arrange the interviews and helped in the distribution of the questionnaires I am also thankful to the beneficiary investors who participated in the interviews and the survey Finally, it would be impossible to say enough about my dear parents and husband for all of their understanding, encouragement, and advice which helped me to overcome the most difficult times in order to complete this research in time Phung Thai Minh Trang Page: i EXECUTIVE SUMMARY Although finance has been studied for a long time, behavioral finance, which encompasses human behaviors in finance, is a fairly new area Behavioral finance theories, which are based on human psychology, attempt to understand how emotions and cognitive errors influence individual investors‟ behaviors (investors mentioned in this study are referred to as individual investors) The main objective of this study is the exploring of the behavioral factors influencing individual investors‟ decisions at the Ho Chi Minh Stock Exchange Furthermore, it is related to relations between these factors and the results that they achieve Since there are limited studies about behavioral finance in Vietnam, this study is expected to significantly contribute to the development of this type of research 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 collected data is then analyzed by using SPSS software Questions of the interviews with some managers of the Ho Chi Minh Stock Exchange are conducted to achieve a deeper understanding of these behaviors The results showed that there were three behavioral factors affecting the investment decisions of individual investors at the Ho Chi Minh Stock Exchange including representativeness, gambler‟s fallacy and over-under reaction Representativeness and over-under reaction had positive impacts on investors‟ investment decision making, whereas gambler‟s fallacy had negative impacts Additionally, the behavioral factor of representativeness positively influenced the investment decision at the highest level The results also presented that three behavioral factors did not affect investment decision including availability bias, Page: ii mental accounting bias and herd behavior In addition, the paper gave some implications of study such as preference of investors for buying blue chip stocks, midcap and penny stocks as well, avoiding buying stocks with poor performance in the recent past or useful lessons of stock fluctuation, etc Moreover, the paper also gave recommendation for individual investors in using behavioral factors with an acceptable level in order to bring good investment results Finally, it mentions limitation s, colclusion as well as further research Page: iii TABLE OF CONTENTS ACKNOWLEDGEMENT .i EXECUTIVE SUMMARY ii TABLE OF CONTENTS iv LIST OF TABLES vii LIST OF ABBREVIATION viii CHAPTER 1: INTRODUCTION……… 1.1 Research background 1.2 Problem of statement 1.3 Research questions 1.4 Research scope 1.5 Research method 1.6 Significance of the research 1.7 Structure of the study CHAPTER 2: LITERATURE REVIEW 2.1 Classical finance theory versus behavioral finance 2.2 Review some behavioral factors impacting on the process of investors’ decision making 10 2.2.1 Representativeness 11 2.2.2 Availability bias 11 2.2.3 Gambler’s fallacy 12 2.2.4 Herd behavior: buying and selling decisions 12 2.2.5 Mental accounting 13 2.2.6 Over and under-reaction 13 2.4 Suggested research model 16 2.5 Research model 20 CHAPTER 3: RESEARCH METHODOLOGY 21 3.1 Research design 21 3.1.1 Research methods 21 3.1.2 Research process 22 3.1.3 Sample size 22 3.2 Adjusted research model 23 3.3 Scales measurement design 25 3.3.1 Scales measurement of Representative bias 26 3.3.2 Scales measurement of mental accounting bias 27 Page: iv 3.3.3 Scales measurement of gambler‟s fallacy 27 3.3.4 Scales measurement of availability bias 28 3.3.5 Scales measurement of herd behavior 29 3.3.6 Scales measurement of over-underreaction 30 3.3.7 Scales measurement of investment decision 31 3.4 Data analysis approach 32 3.4.1 Test of scales measurement reliability 32 3.4.2 Exploration factor analysis (EFA) 33 CHAPTER 4: DATA ANALYSIS AND FINDINGS 35 4.1 Data description 35 4.2 Factor analysis of behavioral variables influencing the individual investment decisions 36 4.2.1 Pilot survey (N=52) 36 4.2.2 Results of Cronbach‟s alpha analysis of pilot survey (N=52) 36 4.2.3 Results of Cronbach‟s alpha analysis of official survey (N=220) 37 4.2.4 Factor analysis (EFA) 39 4.3 Regression analysis 42 4.3.1 Results of regression analysis 43 4.3.2 Test of assumptions 46 CHAPTER 5: RECOMMENDATION AND CONCLUSION 48 5.1 Implications of the study 48 5.2 Recommendations for individual investors at the HOSE 52 5.3 Limitations of the study 53 5.4 Conclusion 54 5.5 Further research 55 Appendix 5.1 63 Appendix 5.2 70 Appendix 5.3 73 Appendix 5.4 80 Appendix 5.5 81 Appendix 5.6 90 Appendix 5.7 91 Page: v LIST OF TABLES Table 1: The highest and lowest VN-index from 2000 to 2012 Table 2.1: Summarizing results of researches of behavioral factors 17 Table 3.1: Items of Representative 26 Table 3.2: Items of mental accounting bias 28 Table 3.3: Items of gambler‟s fallacy 29 Table 3.4: Items of availability bias 30 Table 3.5: Items of herd behavior 32 Table 3.6: Items of over-underreaction 36 Table 3.7: Items of investment decision 33 Table 4.1: Idependent variables, dependent variables and items 38 Table 4.2: Cronabach‟s alpha test of items (N=52) 39 Table 4.3: Cronbach‟s alpha test of items (N=220) 40 Table 4.4: KMO and Bartlett‟s Test, total variance explained and rotated component matrix (EFA time 1) 42 Table 4.5: Summary of KMO and Bartlett‟s Test, total variance explained and rotated component matrix (EFA time 2) 43 Table 4.6: Rotated component matrix (EFA time 2) 44 Table 4.7: summary of grouped items 45 Table 4.8: Means, Standard Deviations, and Intercorrelations of RETURN and Predictor Variables 46 Table 4.9: Simultaneous Multiple Regression Analysis Summary 54 Table 4.10: Results of hypothesis test 56 Table 2.2: Summarizing researchers studying behavioral factors that impacts investment decision making 95 Page: vi LIST OF ABBREVIATION EFA : Exploratory Factor Analysis HOSE : Ho Chi Minh Stock Exchange HAS : Ha Noi Stock Exchange SPSS : Statistical Package for the Social Sciences VN-Index : Vietnam Index of Stock Price Page: vii CHAPTER 1: INTRODUCTION 1.1 Research background The Vietnamese stock market was established in 1998 It consists of the Ho Chi Minh City stock exchange (HOSE) and the Ha Noi stock market (HAS) At the first stage, in 2000, the Vietnam stock market had only listed companies and security companies However, after more than ten years, there are currently 682 member securities companies These mark the development of the Vietnamese stock market in general and the HOSE specifically Starting at 100 points in July 2000, after one year in operation in June, 2001, the VN-Index had increased fivefold and reached a peak at 571 points Investors were overly excited and dreamed of earning quick money as demand rose significantly even though there were only a few listed stocks on the stock exchange However, it was lack of knowledge and trading experience of investors as well as the insufficient support from the authorities that made the VNIndex to suddenly unceasingly fall until it reached the bottom at 139 points in March 2003 (Huy, 2010) Investors who joined the market during this period and who were not able to jump out quickly had to face severe financial difficulties due to the huge loss of assets The stock market then seemed to go into a hibernative status until 2005 and finally “woke up” in 2006 The boom started in the second half of 2006 and the stock market rocketed up to 1170 points by March 2007 It fluctuated around the 1000 point mark until October, 2007 The Ho Chi Minh stock market had never been “hotter” than at that time However, VN-Index went again into a decline stage after being pushed up to the peak The Ho Chi Minh stock market experienced a gloomy year in 2008 and VN-Index only stopped decreasing in February 2009 at 245 points Economic experts and analysis explained the sharp decline of the VN-Index that was affected by various factors such as the tightening of monetary policies, especially the lending for stock investment, high deposit interest rates, high inflation rates, and a recession in the United States economy Lack of timely intervention by the authorities was also a reason why VN-Index fell so dramatically (Vo and Pham, 2008, p.15) From 2009 to the first quarter of 2011, VN-Index continued to undergo many upsand-downs: reaching another peak at 542 points in May 2010, another bottom at 351 points in November, 2010 However, it seemed to fluctuate around 400-500 points and no significant amplitude was found in 2012 Table 1: The highest and lowest VN-index from 2000 to 2012 Year 2000-2005 Highest prices Lowest prices 571.04 (2001) 132.7 (2004) 2006 591.4 439.6 2007 1170.67 883.9 2008-2009 921.07 (2008) 244.4 (2009) 2010-2011 542 (5/2010) 350.5 (2011) 490 335 2012 (Source: www.cafef.vn) 1.2 Problem of statement During twelve years, the HOSE specifically and the Vietnamese Stock exchange in general went through many different stages Its prices fluctuated, up and down, and it seemed to be difficult for investors to make sound investment decisions Especially, with the boom of VN-Index 2007, the Vietnam Stock Market was negatively impacted by foreign newspapers The Financial Times showed that the HOSE was a „too hot place‟ and overstated its value The AMCHAM (The American Chamber of Commerce) declared that the Vietnam stock market‟s growth was impractical, just another case of a „bubble market‟ ... at the Ho Chi Minh Stock Exchange The collected data is then analyzed by using SPSS software Questions of the interviews with some managers of the Ho Chi Minh Stock Exchange are conducted to achieve... deeper understanding of these behaviors The results showed that there were three behavioral factors affecting the investment decisions of individual investors at the Ho Chi Minh Stock Exchange including... background The Vietnamese stock market was established in 1998 It consists of the Ho Chi Minh City stock exchange (HOSE) and the Ha Noi stock market (HAS) At the first stage, in 2000, the Vietnam stock