1 INTRODUCTION 1. Imperativeness of the thesis The Vietnamese stock market was officially put into operation over 12 years ago. During the period, the market has gone through ups and downs, reflected by the volatility of the VN-Index. Volatility of the Vietnamese stock market over the past time illustrates the necessity of studying investor behavior. The evidence of market "bubbles" or excessive drops in share prices have shown that investors do not always act wisely and smartly as expected. The standard finance theories were unable to explain unexpected fluctuations of the Vietnamese stock market over the past time. In addition, the study of investor behavior on the basis of behavioral finance theory will help securities market management agencies and regulators to deploy reasonable management policies at the right time to ensure the sustainable development of the market. Behavioral finance is developed by incorporating psychology into finance. It was almost 100 years since French psychologist Gabriel Tarde started researches on the application of psychology in economic science in the 1880s until the application of psychology in finance made significant progress in the 1980s. Fundamental works by Amos Tversky and 2002 Economics Nobel winner Daniel Kahneman (1979), Richard H.Thaler (1985) and especially Robert Shiller with his well-known book "Irrational Exuberance" (2000), which accurately predicted the collapse of the global stock market soon after, created a turning point for the studies of behavioral finance. Although behavioral finance started only over two decades ago, the theory has made an important contribution to explaining the acts different from "rational expectations", the behavioral biases of investors and "herding" investments in the commodity market, the stock market or the monetary market. Behavioral finance contributes to explaining the "bubble" phenomenon on these markets, especially in emerging markets like the Vietnamese stock market. Furthermore, behavioral finance theory can offer scientific bases for adjusting pricing models (including securities 2 andderivatives pricing models, etc.); for being applied in corporate governance theories or for explaining the interaction among different markets. 2. Research Objective The Dissertation "The investor behavior on the Vietnamese stock market" focuses on clarifying six main issues related to the behavior of individual investors on the Vietnamese stock market as follows: (1) Explore and measure the determinants of individual investor behavior on the stock market; (2) Explore the factors that influence individual investor behavior; (3) Clarify the impact of psychological factors on individual investor behavior; (4) Clarify the relationship between education level and transaction scale with investment efficiency; (5) Clarify the availability effect and behavioral biases of individual investors on the Vietnamese stock market; Demonstrate that individual investors on the Vietnamese stock market are “irrational” and do not follow the prospect theory; (6) Explore the herd mentality on the Vietnamese stock market. 3. Object and scope of the study The object of the study is the behavior of individual investors on the Vietnamese stock market. The Dissertation studies individual investor behavior via questionnaires to 500 individual investors on the Vietnamese stock market. In addition to the questionnaire, the Dissertation uses the trading results of the 2,300 accounts of individual investors with over 100,000 orders to analyze and examine the behavior of individual investors. The scope of the Dissertation is limited to the behavior of individual investors. 4. Fundamental theoretical framework Prospect Theory developed by Kahneman and Tversky (1979, 2000),an important work that helped Kahneman win the Nobel Prize in 2002,was used as the theoretical foundation for the Dissertation. 5. Research hypotheses Hypothesis 1: Individualinvestors on the Vietnamese stock market are irrational and their behavior is explained by Prospect Theory. Hypothesis 2: Psychological components in the behavior of individual investors 3 on the Vietnamese stock market include(1) Over-optimism; (2) Herding mentality; (3) Overconfidence; (4) Risk aversion; and (5) Pessimism. Hypothesis 3: Education level has positive correlation with psychological elements: optimism and confidence; while it has negative correlation with psychological elements: pessimism, attitude towards risks and herding mentality. Hypothesis 4: Age of investorshas positive correlation with psychological elements: optimism and confidence; while it has negative correlation with psychological elements: pessimism, attitude towards risks and herding mentality. Hypothesis 5: The relationship between education level and other measures related to investor behavior: Hypothesis 6: The relationship between the age of investors and other measures related to individual investor behavior: Hypothesis 7: Male investors are usually more confident and more effective in securities investments than female counterparts. Hypothesis 8: Education level raises the profitability ratio, whereas average total investment reduces the profitability ratio. Education level has larger impact on profitability than total investments. Hypothesis 9: Elements of fundamental analysis of securities investment (macro analysis, industry analysis, company analysis) affect the decisions of individual investors. Hypothesis 10: There isempirical rule effects(heuristic) in the behavior of individual investors Hypothesis 11: Account distribution effectexists in the behavior of individual investors Hypothesis 12: Herd mentality exists in individual investor behavior 6. C ontribution of the Dissertation * Academic and theoretical contributions Based on about 100 researches on behavioral finance, the Dissertation focuses on clarifying the theoretical foundation on individual investor behavior on the stock market according to behavioral finance approach. Academically, theoretical contributions of the Dissertationare presentedin the following main aspects: 1. Constructing the main themes (main contents) of individual investor behavior according to behavioral finance approach. 2. Create a link between the theory on testing individual investor behavior via questionnaire and testing of individual investor behavior through real trading results on investor accounts. 4 * Findings and recommendations drawn from the research results (1) The Dissertation finds quantitative evidence to show that individual investors on the Vietnamese stock market are irrational and have behavioral biases. Therefore, standard finance theoriesare unable to explain the behavioral biases of investors. TheDissertation then recommends changinga number of policies related to the management and operation of the stock market such asspecifying price fluctuation magnitude, banning short selling transactions, regulatingand controlling information disclosure. (2) The Dissertation develops a model to measure behaviors of individual investors withfivegroups of psychological factors and 19 attributes: (1) Overoptimism; (2) Herding mentality; (3) Overconfidence; (4) Risk aversion; and (5) Pessimism. The Dissertation then recommends that Vietnam should develop a set of indicators to measure Sentiment Index, in addition to other quantitative indicators such as VN30, HNX30 and VIR50. (3) From the research results, the Dissertationsuggests merging two stock exchanges into one single Exchange in the near future and proposes measures to limit the mechanisms creating conditions for the development of behavioral biases of investors to avoid wasting and to fit inthe trend of international integration. The Dissertation also emphasizes thenecessitytoform and develop the derivative stock market in the near future. (4) The Dissertation findsquantitative evidence about the relationship between age and education level with groupsof psychological factors. The Dissertationaffirms the importance ofraising the investors’ competence and knowledge of behavioral finance to limit distortions and ensure sustainable development of the stock market. (5) The Dissertation findsquantitative evidence about behavioral biases of individual investors such as extraposition bias, disposition effect, herding bias, etc. (6) From the research results, the Dissertation confirms that there arefour groups of factors related to the macroeconomic environment and the stock market (18 attributes), five groups of factors related to listed securities (26 attributes) and four groups of factors related to investors themselves (12 attributes), affecting the decision-making process of individual investors. This is the basis for renewing the criteria forinformation disclosure regulation of the SSC. The Dissertationdemonstratesthat inflation is not a factor reallyinfluencing the decisions of individual investors (contrary to current assessments). 5 CHAPTER 1 RATIONALE FOR INDIVIDUAL INVESTOR BEHAVIOR ON THE STOCK MARKET ACCORDING TO BEHAVIORAL FINANCE 1.1. Overview of individual investor behavior on the stock market Individual investors are those who have temporary idle funds andmake investmentson their own accounts in order to achieve personal financial goals. Individual investors often have little capital, no long-term investment strategy; do not follow specific investment philosophy; are vulnerable and easily get hurt. Therefore, investment decisions of individual investors are often made quickly. The behavior of individual investors are affected by both internal and external factors. Internal factors include cognitive capability; gender; age; personal feelings;and mood. External factors includeeconomic factors; socio-political and cultural factors; 1.2. Behavior of individual investors on the stock market according to behavioral finance approach 1.2.1. Formulation and development of behavioral finance Pillars of standardinvestment financetheories, such as Arbitrage theory by Merton Miller and Franco Modigliani; Modern portfolio theory by Harry Markowitz (1990 Nobel winner); Capital asset pricing model (CAPM) by John Lintner and William Sharpe (1990 Nobel winner) and Option pricing theory by Fischer Black, Myron Scholes and Robert Merton (1997 Nobelwinner) were all based on the assumption that investorswererational. However, reality proved that standard financetheories and models were unable to explain the stock market bubbles and crisis in the world and in Vietnamover the past years. Behavioral finance theories, with the basisstated that "the market is not always efficient" and "investors are irrational", have shaken the "efficient market" theory, the foundation of standardfinance theoriesover the pastfive decades. Behavioral finance theory is developedby incorporating psychology into finance, a relatively late development. It was almost 100 years since French psychologist Gabriel Tarde started researches on the application of psychology in economic science in the 1880s until the application of psychology in finance madesignificant progressin the 1980s. (Though studies by George Kanotahad laid the foundation for behavioral finance with an important term "expectation" in the 1930s and 1940s, his workswere quite limited). Fundamental worksby Amos Tversky and Daniel Kahneman (1979), Richard H.Thaler (1985) and especially Robert Shiller with hiswell-known book "Irrational Exuberance" (2000), which accurately predicted the collapse of the global stock markets soon after, urged behavioral finance researchers to 6 constantly conduct new studies. There was an important researchin 1993 byJegadeesh and Titman onmomentum effect, which remained a challenge for "efficient market" advocates. There weremanyversions proposing toutilize this effect to make outstanding profits with low risks. (The latest version was the study bySagi and Seasholes announced in 2007 with the results that could not have beenexplained by the efficient market model; risk and return or arbitrage trading theories. Behavioral finance is a relatively new field; yet it is developing rapidly. By incorporating theories of psychological formulation with classical finance and economics, behavioral finance is the key to explaineconomic decisions. Previously, the studies of behavioral finance were not thoroughly carried out,as it was believed that an investor only needed to observe how others traded and then followed them. It was considered as the basis for trading decisions. The study of behavioral finance candemonstrate that trading activitiesare based on investor behavior, either in the form of individual or collective. For example, behavioral finance helps to explain the causes and manifestations of inefficient market operations. Although behavioral finance remains a controversial field fortraditional finance researchers, it is gradually assertingits key position in today's financial trends. 1.2.2. Fundamental theories of behavioral finance - Prospect theory American Psychologist Professor Daniel Kahnemanwon the Nobel Prize in Economics for his work on behavioral finance and "prospect theory", creating a solid foundation for the developement of behavioral finance. Prospect Theory developed by Daniel Kahneman and Tversky (1979) andits adjusted version namedCumulative Prospect Theory by Tversky and Daniel Kahneman (1992) are considered as perfect supplements to Expected Utility Theory. Prospect Theory provides a model for making decisionsbetween alternatives that involve risk, where the probabilities of outcomes are known.The value function in Prospect Theory replaces utility function in Expected Utility Theory. While utility is often quantified in terms of income,the value is determined by gains and losses compared with a reference point. Three main observed features of human decision-making process requires certain characteristics of the value function: Humans are risk averse in gains and risk seeking in losses, which means the value function is convex with positive values and concave with the negatives. A decision is made by paying attention to the gains and losses, i.e. the point of the value function is not income, but the change in income, and people do not like losses. Therefore, the value function for the lossesis steeper than for the gains. The value function built by Kahneman and Tversky (1974) differed from the expected utility functionas the value function hada reference point or personal comparison point (a measure of targeted wealth) determined by the subjective impression. 7 - Irrational Mental Accounting To study irrational accounting, researchers of behavioral finance organize to study behavioral finance in the context of no risks. Mental accounting is a method that people use to manage decision-making process more easily. According to Richard Thaler (2005), "Mental accounting is the set of cognitive operations used by individuals and households to organize, evaluate and keep track of financial activities." The determinants of mental accounting include accounts classifying, closing, and evaluating. - Narrow Framing A frame is determined by human presentation, perception aboutthe question and characteristics of each person. If the decision of an individual changessimply due to changes in the frame, the Expected utility theory does not work as it assumes people make consistent choices, regardless of how the problems are presented. 1.2.3. Individual investor behavior according to behavioral finance approach 1.2.3.1. Heuristics and biases Empirical rules, also known as the "rule of thumb",are methods to minimize search fornecessary information to come up with a solution to a problem. These are the "shortcuts", simplifying the methods to estimate probability and value that are commonly done to make decisions and reducing computational complexity. Empirical rules provide very convincing subjective approaches, but reflect the fact that human assessment of risk and possibility often fails to comply with probability theories accurately. This part of the Dissertation focuses on three types of empirical rules introduced by Kahneman, Slovic, and Tversky (1982) and Slovic et al. (2002): representativeness, availability, anchoring and adjustment. 1.2.3.2. Behavioral biases Hirshleifer (2001)claimed that the majority of behavioral biases of investors are the results offour main groups of reasons: self – deception; heuristic simplification; emotion; and social interaction. 8 Figure 1.3.Classifications of investors’ behaviorbiases - Overconfidence Bias Investors areusually overconfident (excessively confident). Overconfident investors always have irrational beliefs in their arguments, assessments and intuitive cognition. They often incorrectlyestimate the probability for a certain event as they think they are wiser or can beat other investors in the market with better information. - Loss Aversion Bias Loss aversion will urge investors to grasp securities with prices on the fall as they aim to wait for share prices to bounce up before proceeding with their trading. However, lack of assertiveness will drive such investors to greater losses. - Over-optimism Bias Most people tend to assess themselves as superior to the average and investors are no exceptions. Investors are often overly optimistic about the market, economic system and potential investments. - Illusion of Control Bias The illusion of control describes investors who think they can use reasoning and emotion to control or at least affect investment results, but in fact, they cannot. - Self Attribution Bias Aself-attribution bias or self-serving bias or a self-serving attributional bias refers to individuals attributing their successes to internal or personal factors such as Biases Self Deception Overoptimism Illusion of Control Illusion of Knowledge Overconfident Self Attribution Bias Confirmation Bias Hindsight Bias Cognitive Disonance Conservatism Bias Heuristic Simplification Representative Framing Categorization Anchoring/Salience Availability Bias Cue competition Loss Aversion/Prospect Theory Emotion/Affect Mood Self Control Ambiguity Aversion Regret Theory Social Interaction Imitation Contagion Herding Cascades 9 talents or sensitivity to future events; but attributing their failures to external or situational factors. - Confirmation Bias Confirmation bias refers to investors’ selective acquisition of information that will be respectedif itconfirms their investment decisions and of less value when it conflicts with their predictions. - Hindsight Bias Once an event passes, people affected by this psychological effect tend to realize that they can predict an event, even when it is unpredictable. - Cognitive Disonance Bias When people receive new information opposing to their previous understandings, they often experience emotional discomfort - the psychological phenomenon known as cognitive disonance. - Conservatism Bias Conservative ideology is a human psychological process related to the admiration of past predictions and lack of access to new information. - Representativeness Bias The bias is often described simply as the tendency of not paying much attention to long-term factors, but being more interested in typical short-term situations. - Anchoring/Salience Bias When people need to estimate a value with an unknown magnitude, they begin byfiguring out a few initial estimates and defaults - a "trusted source" - that they then adjust up or down according to information and analysis. - Availability Bias Availabilitybias occursas people easily recall available rules in their memory. The importance of rules depends on the contentsthemselves. Availability bias can lead people to overestimate the probability of a public event or serious event, especially newones. - Emotion/Affect Emotion and unconscious needs of human beings, imagination or fear will control many decision-making behaviors of investors. The main effectsstudied by psychoanalytic researchers include:  Paranoid personality disorder  Narcissistic personality disorder  Depressed personality disorder  Self control 10 Self-control is a feature of human behaviors that describesthe consumptionof today basing on expenses that can be savedlater. The tendency of self-control can also be described as a conflict between desire and ability. - Ambiguity Aversion Humans do not like to bet without knowing the probability of potentialoutcomes. In general, people hesitate in case of uncertainty, a state of ambiguity aversion. - Regret Theory Peoplewith regret anticipation always avoid decisive actions,as they fear that in hindsight, whatever they choose will be less optimal. 1.2.3.3. Herding Herd behavior or herd mentality is the behavior of an investor who imitates the actions of other investors or follows the movements of the market instead of relying on their information sources and strategies. In broad terms, herd behavior is a convergence of behavior when individuals make decisions in the same direction within a specific time. Herd behavior can occur for both institutional and individual investors and is a major cause of "bubbles" or stock market crisis. [...]... CHAPTER 3 INDIVIDUAL INVESTING BEHAVIOR IN VIETNAM STOCK MARKET 3.1 Overview of individual investor behavior in Vietnam stock market through the analysis on questionnaire result 3.1.1 Major characteristics of the sample In order to identify and analyze the behavior of individual investors in Vietnam stock market, the author of this paper has conducted survey, research and interview on 525 individual investors... ON THE BEHAVIOR OF INDIVIDUAL INVESTORS IN VIETNAM STOCK MARKET 4.1 Implications and consequences of research into individual investors’ behaviors in Vietnam stock market 4.1.1 Implications and consequences in the case of irrational investors The analysis of data sets of investigation, questionnaire and account deal provides quantitative evidences in Chapter 3 to prove that investors in Vietnam stock... their behaviors in order to build up stock market trust PROPOSED SOLUTIONS AND RECOMMENDATION BASED ON THE STUDY ON THE BEHAVIOR OF INDIVIDUAL INVESTORS IN VIETNAM STOCK MARKET 4.3 Proposed solutions and recommendation based on the study the bahavior of individual investor in vietnam stock market 4.3.1 Solution and recommendation proposed to Ministry of Finance and State Security Commission of Vietnam 4.3.1.1... Fund in Vietnam 4.3.1.4 Establish an agency to protect individual investors and promote the transparency in the Vietnam stock market This thesis suggests some specific solutions to protect individual investors and promote the transparency in the Vietnam stock market as follows: (1) Separate the direct supervision through the supervision on the abiding to legal regulation and the indirect supervision... on the investment decision making of the individual investor 19 3.2 Overview of individual investor behavior in Vietnam stock maket through the analysis on transaction result 3.2.1 The available rule effect in behavior of individual investor The test result of Hypothesis 10 and Hypothesis 11 shows that individual investors a lot of mistakes (bias) in behavior, such as: extraposition bias; portfolio... included in the sample 3.1.2 General identification of individual investor behavior a) Attitude towards risk and profit Hypothesis 1: Individual investors in Vietnam stock market are irrational and their behavior is explained by expectation theory The result reveals that individual investors in Vietnam stock market are irrational and their behavior is explained by expectation theory as mentioned in Chapter... available rules effect and the biases in the behavior of individual investors 13 In order to identify the biases and the available rules effect in the behavior of individual investors in Vietnam stock market, the research team employs the statistics of actual transactions of investors’ accounts The statistics utilized in this paper is provided by a Vietnamese security company Among all the brokerage... Perspectives of adjusting investors’ behaviors in order to develop stock market in Vietnam Perspective 1: Behaviors of individual investors need to be adjusted based on strategy of minimizing irrational behaviors and biases Furthermore, it is necessary to build up interference preventing systematic development of behavioral biases 24 Perspective 2: Behaviors of individual investors need to be adjusted... Chapter 1 of the Dissertation Thirdly, clarify the basis for investment decisions of individual investors on the Vietnamese stock market Through EFA test, the author will explore factors that affect investment decision-making behaviors of individual investors on the Vietnamese stock market The factors will be divided into groups according to fundamental analysis process in stock investments, including:... methodology and data on individual investor behavior through questionnairesaccording to behavioral finance approach 2.1.1 Research methodology The Dissertation author conducted a survey and analyzed data from a survey of individual investors on the Vietnamese Stock Market with a questionnaire including 35 questions to clarify the following issues about behaviors of individual investors: Firstly,identify, . 15 CHAPTER 3 INDIVIDUAL INVESTING BEHAVIOR IN VIETNAM STOCK MARKET 3.1. Overview of individual investor behavior in Vietnam stock market through the analysis on questionnaire. individual investor. 20 3.2. Overview of individual investor behavior in Vietnam stock maket through the analysis on transaction result 3.2.1. The available rule effect in behavior of individual. individual investor behavior according to behavioral finance approach. 2. Create a link between the theory on testing individual investor behavior via questionnaire and testing of individual