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 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 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 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 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, performance, Vietnam individual investor, decision making, investment 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 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 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 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 positive influence on the investment performance? 1.4 Scope of the research There are several heuristic factors influencing behaviors of investors in stock markets In this study, three heuristic factors are taken into account, namely representativeness, availability and overconfidence There are factors that mentioned in several studies such as the research on overconfidence bias (Glaser and Weber, 2012), the study on representativeness bias (Taffler, 2012) and analysis regarding to the effects of behavioral factors on investment decision making by unit companies in Kenya (Shikuku, 2010) and so on In this thesis, individual investors are concerned because according to the report of the Wall Street Securities (2014) this group of investors account for over 60 percentages of investors trading in the Vietnamese stock market In addition, due to the time constraint, the research focuses only on the heuristic behaviors of individual investors studying or working at the Ho Chi Minh City only The Ho Chi Minh City is chosen because it is often considered as the biggest economic center of Vietnam and the biggest Vietnamese stock exchange, namely the Ho Chi Minh Stock Exchange, is located there 1.5 Structure of the thesis This thesis is organizes in five chapters as follow: Chapter is an introduction chapter This chapter describes an overview of research background, research problem, and objective Besides, the scope of research, implications, and structure of thesis are also present Chapter is about presenting previous research done on the stream of studies related to theoretical foundation regarding to explain prospect theory and heuristics theory as well Besides, heuristics of individual investors also is presented in detail in the research More importantly, investment decision making and investment performance of individual investors is clearly explored as well This chapter is to concentrate on explaining each variable in the model, and reasons for choosing them to be included in the research model Chapter is research methodology chapter Firstly, research process is presented in general Then, research design and sampling are also mentioned regarding to qualitative method and quantitative method as well After that, the measurement scales apply for the research factors will be determined clearly and suitably This chapter also defines how to collect data and analyze the data collected to test the research hypotheses proposed in chapter Finally, research method is explained in detail regarding to Cronbach alpha, Exploratory Factor Analysis and Multiple regression analysis Chapter is the analysis and discussion chapter In detail, data background is firstly mentioned and measurement reliability of each factor using Cronbach’s alpha is properly presented as well Moreover, scale testing by using Exploratory Factor Analysis and multiple regression analysis is explored in detail in the session Furthermore, this part also discusses the method for collecting data used to test the hypothesis, and it analyses the data received, its reliability and multiple regression as well The last chapter, chapter discusses the results and research findings This chapter gives conclusion, implication, and research limitations Finally, this thesis makes suggestions for further research on the topic area 21 You are sure you can make correct investment decision III YOUR DECISION MAKING Please give your opinion about the levels of agreement for the following statements: Disagree Neutral Agree Extremely agree 21 Your investment has a lower risk compared to the market in general 22 Your investment in stocks has high degree of safety 23 Your investment has the ability to meet interest payments Statements IV Extremely disagree YOUR INVESTMENT PERFORMANCE Please give your opinions about the levels of agreement for the following statements: Disagree Neutral Agree Extremely agree 24 You feel satisfied with your investment decisions in the last year (including selling, buying, choosing stocks and deciding stock volume) 25 The return rate of your recent stock investment meets your expectation 26 Your investment in stocks has demonstrated increased revenue growth in last year Factors Extremely disagree BẢNG CÂU HỎI (Vietnamese version) Kính gửi: Ơng/Bà Tơi sinh viên cao học ngành quản trị tài trường ĐH Kinh Tế TPHCM Tôi trình làm luận văn tốt nghiệp đề tài “Nghiên cứu nhân tố đoán tác động đến định kết đầu tư chứng khoán nhà đầu tư cá nhân Việt Nam” Chính vậy, tơi mong Ơng/Bà, với tư cách nhà đầu tư cá nhân, đưa quan điểm thơng qua bảng câu đính kèm Tơi kính mong Ơng/Bà dành 5-10 phút để giúp tơi hồn tất bảng câu hỏi Kết thu từ bảng khảo sát khơng giúp chúng tơi hồn thành tốt luận văn mà cịn giúp nhà đầu tư có thơng tin bổ ích cho định đầu tư Tất số liệu thu thập giữ kín trình bày báo cáo tổng hợp, đảm bảo thông tin cá nhân không bị tiết lộ Tôi biết ơn giúp đỡ q Ơng/Bà chúc Ơng/Bà ln nhà đầu tư thành cơng sàn chứng khốn Việt Nam Nếu Ơng/Bà có nhu cầu, chúng tơi sẵn sàng cung cấp báo cáo tổng hợp khảo sát để ông bà tham khảo Mọi chi tiết xin liên hệ: Nguyễn Thị Thanh Thúy, Email: thuy.nguyentt90@gmail.com I THÔNG TIN CÁ NHÂN Giới tính Nam Tuổi 18-25 26-35 Nữ 36-45 Tình trạng nhân: Single 46-55 Over 55 Married Trình độ học vấn Cấp trở xuống Cao đẳng trung học Đại học chuyên nghiệp Thạc sĩ Tiến sĩ Khác Số năm kinh nghiệm làm việc Dưới năm 5-10 năm Trên 10 năm Divorced Xin vui lịng cho biết thu nhập bình qn tháng ông/bà Dưới triệu Từ 6-12 triệu 12-20 triệu Trên 20 triệu Ông/bà tham gia vào thị trường chứng khoán bao lâu? Dưới năm 1-3 năm 5-10 năm 10 năm 3-5 năm Ông/bà vui lịng cho biết tài khoản đầu tư ơng/bà mở công ty nào? Công Ty CP Chứng Công Ty CP Chứng Cơng Ty TNHH Khốn Sài Gịn Khốn TP.HCM Chứng Khốn ACB Cơng Ty CP Chứng Cơng Ty CP Chứng Cơng Ty CP Khốn Bản Việt Khốn VNDirect Chứng Khốn MB Cơng Ty CP Chứng Cơng ty TNHH Chứng khốn Ngân hàng TMCP Ngoại thương Việt Nam Cơng Ty CP Chứng Công Ty CP Chứng Công Ty CP Chứng Cơng Ty CP Chứng Khốn BIDV Khốn Rồng Việt Khoán Sao Việt Khoán FPT Khoán Maybank Kim Eng Ông/bà tham gia khóa đào tạo đầu tư chứng khốn chưa? Có Chưa Nếu “Có”, vui lòng trả lời câu hỏi 10, “Chưa” vui lòng chuyển sang câu hỏi 11 10 Khóa học đầu tư chứng khốn mà ơng/bà tham gia bao lâu? tháng tháng tháng 11 Ông/bà vui lòng cho biết tổng số tiền đầu tư ông/bà sàn Hồ Chí Minh từ tham gia vào thị trường chứng khoán Dưới 200 triệu Từ 200 triệu đến tỷ Trên tỷ 12 Tổng số tiền ơng/bà đầu tư vào sàn Hồ Chí Minh năm vừa qua Dưới 200 triệu II Từ 200 triệu đến tỷ Trên tỷ CÁC YẾU TỐ PHỎNG ĐỐN ẢNH HƯỞNG ĐẾN QUYẾT ĐỊNH ĐẦU TƯ Xin ơng/bà vui lịng đánh giá mức độ đồng tình ơng/bà phát biểu sau: Các yếu tố Hoàn tồn Khơng khơng đồng ý đồng ý Trung lập Địng ý Hồn tồn đồng ý 13 Ơng/bà mua loại chứng khốn “nóng” tránh mua loại chứng khoán sinh lợi năm gần 14 Ông/bà dựa giá để dự đoán thay đổi giá tương lai 15 Ơng/bà phân tích xu hướng vài cổ phiếu đại diện để định đầu tư cho cổ phiếu khác? 16 Ông/bà định đầu tư dựa vào kinh nghiệm thân? 17 Ông/bà ưu tiên đầu tư vào cổ phiếu nước cổ phiếu nước thơng tin cổ phiếu nước đầy đủ 18 Theo ông/bà, thông tin từ người thân bạn bè nguồn tin đáng tin cậy cho trình định đầu tư 19 Ông/bà tin kỹ kiến thức ơng/bà giúp ông/bà đạt mức sinh lợi cao mức trung bình ca thị trường 20 Ơng/bà tin định đầu tư đắn III QUYẾT ĐỊNH ĐẦU TƯ CỦA ƠNG/BÀ Xin ơng/bà vui lịng lựa chọn mức độ đồng tình ơng/bà phát biểu sau đây: Các nhận định Không đồng ý Trung lập Địng ý Hồn tồn đồng ý 21 Nhìn chung, rủi ro việc đầu tư ông/bà thấp thị trường 22 Quyết định đầu tư ơng/bà an tồn 23 Quyết định đầu tư ơng/bà có khả đáp ứng khoản tốn lãi suất IV Hồn tồn khơng đồng ý KẾT QUẢ ĐẦU TƯ CỦA ƠNG/BÀ Xin ơng/bà vui lịng lựa chọn mức độ đồng tình ơng/bà phát biểu sau đây: Các nhận định Khơng đồng ý Trung lập Địng ý Hồn tồn đồng ý 24 Ơng/bà cảm thấy hài lịng với định đầu tư ông/bà năm vừa qua (bao gồm định chọn, mua, bán số lượng cổ phiếu lựa chọn, mua bán) 25 Tỷ suất sinh lời việc đầu tư chứng khốn đáp ứng mong đợi ơng/bà Hồn tồn khơng đồng ý 26 Ông/bà đạt mức tăng trưởng thu nhập năm qua APPENDIX APPENDIX – PILOT STUDY Case Processing Summary N Cases Valid Excludeda Total % 94 100.0 0 94 100.0 a Listwise deletion based on all variables in the procedure Reliability analysis for each factor Corrected Scale Mean if Scale Variance Item-Total Item Deleted if Item Deleted Correlation RE1 5.63 3.806 0.522 RE2 5.60 3.663 0.682 RE3 5.69 4.603 0.487 Representativeness bias Cronbach's Alpha: 0.735 AVA1 6.36 2.599 0.471 AVA2 6.30 2.491 0.365 AVA3 6.21 3.202 0.304 Availability bias Cronbach's Alpha: 0.566 OVER1 3.52 0.962 0.519 OVER2 3.53 0.983 0.519 Overconfidence bias Cronbach's Alpha: 0.683 DEC1 6.80 2.701 0.656 DEC2 6.43 2.871 0.659 DEC3 6.33 2.912 0.628 Investment decision making Cronbach's 0.802 Alpha: PER1 7.18 3.419 0.679 PER2 6.93 3.059 0.773 PER3 6.89 3.515 0.696 Invetsment performance Cronbach's Alpha: 0.847 Cronbach's Alpha if Item Deleted 0.700 0.496 0.727 0.316 0.491 0.565 a a 0.721 0.718 0.749 0.821 0.728 0.805 KMO and Bartlett's Test Kaiser-Meyer-Olkin Measure of Sampling Adequacy Bartlett's Test of Sphericity 804 Approx Chi-Square 510.314 df 91 Sig .000 Rotated Component Matrixa Component RE1 700 RE2 844 RE3 755 AVA1 762 AVA2 508 404 AVA3 777 OVER1 646 OVER2 720 DEC1 863 DEC2 804 DEC3 741 PER1 795 PER2 840 PER3 745 Extraction Method: Principal Component Analysis Rotation Method: Varimax with Kaiser Normalization a Rotation converged in iterations APPENDIX LIST OF SECURITIES FIRM SELECTED No Name of securities company Saigon Securities Incorporation Hochiminh City Securities Corporation ACB Securities Company Ltd Viet Capital Securities Joint Stock Company VNDirect Securities Corporation MB Securities Joint Stock Company FPT Securities Joint Stock Company Vietcombank Securities Company Ltd Maybank Kim Eng Securities Joint Stock Company 10 BIDV Securities Joint Stock Company 11 Rong Viet Security Joint Stock Company 12 Sao Viet Securities Joint Stock Company APPENDIX KMO and Bartlett's Test Kaiser-Meyer-Olkin Measure of Sampling Adequacy Bartlett's Test of Sphericity 764 Approx Chi-Square 949.809 Df 91 Sig .000 APPENDIX Rotated Factor Matrix a Factor PER2 797 PER3 759 PER1 700 AVA3 RE2 771 RE1 667 RE3 645 AVA1 636 AVA2 427 DEC1 871 DEC2 649 DEC3 558 OVER1 752 OVER2 579 Extraction Method: Principal Axis Factoring Rotation Method: Varimax with Kaiser Normalization a Rotation converged in iterations APPENDIX KMO and Bartlett's Test Kaiser-Meyer-Olkin Measure of Sampling Adequacy Bartlett's Test of Sphericity 753 Approx Chi-Square 832.674 Df 66 Sig .000 APPENDIX Rotated Factor Matrix a Factor PER2 836 PER3 740 PER1 709 RE2 784 RE1 690 RE3 650 AVA1 590 DEC1 864 DEC2 654 DEC3 564 OVER1 802 OVER2 547 Extraction Method: Principal Axis Factoring Rotation Method: Varimax with Kaiser Normalization a Rotation converged in iterations APPENDIX APPENDIX TABLE OF CONTENTS CHATER 1: INTRODUCTION 1.1 Background 1.2 Research problem 1.3 Research objective and research questions 1.4 Scope of the research 1.5 Structure of the thesis CHAPTER 2: LITERATURE REVIEW, HYPOTHESIS AND RESEARCH MODEL 2.1 Theoritical foundation 2.1.1 Prospect theory 2.1.2 Heuristics theory 2.2 Heuristic of individual investors 2.2.1 Definition of heuristics 2.2.2 Classification of heuristics 2.3 Decision making and performance of individual investor 11 2.3.1 Decision making 11 2.3.2 Investment performance 12 2.4 Hypothesis Development 13 2.4.1 Representativeness and investors’ decision making 13 2.4.2 Availability bias and investors’ decision-making 15 2.4.3 Overconfidence and investors’ decision making 15 2.4.4 Investment decision making and investment performance 16 2.5 Conceptual model 17 2.6 Chapter summary 18 CHAPTER 3: RESEARCH METHODOLOGY 19 3.1 Research process 19 3.2 Research design 21 3.2.1 Measure of heuristic factors 22 3.2.2 Measure of investors’ decision making 23 3.2.3 Measure of investment performance 24 3.3 Pilot test 25 3.4 Main survey 27 3.4.1 Sampling 27 3.4.2 The research method 28 3.5 Chapter summary 30 CHAPTER 4: FINDINGS AND DISCUSSIONS 31 4.1 Data background 31 4.2 Measurement Reliability using Cronbach’s Alpha 34 4.3 Scale testing by using Exploratory Factor Analysis (EFA) 36 4.4 Test hypotheses by multiple regressions 37 4.4.1 Regression analysis of variables representativeness, overconfidence and investment decision making (Model 1) 38 4.4.2 Regression analysis of variables investors’ decision making and investors’ performance (Model 2) 42 4.5 Chapter summary 45 CHAPTER 5: CONCLUSION AND RECOMMENDATION 46 5.1 Conclusions 46 5.2 Implication of the study 49 5.3 Limitation and direction for further research 49 ... the individual investors? ?? decision- making in Vietnam Hypothesis H4: The individual investors? ?? decision- making positive impact on their investment performance in Vietnam 2.6 Chapter summary In. .. the individual investors? ?? decision- making in Vietnam 14 2.4.2 Availability bias and investors? ?? decision- making According to Shefrin (2002), availability bias occurs because investors reply on information... faster promotion and greater investment duration (Oberlechner & Osler, 2004, p.3) 2.3 Decision making and performance of individual investor 2.3.1 Decision making Making investment decision is even