...International Management Master’s Thesis Investors’ Psychological Characteristics, Herding Behavior and Investment Performance Student: Nguyen Thi Lan Huong RA6997113 Advisor: Shao-Chi Chang Hao-Chieh Lin June, 2011 Acknowledgements It has been a valuable experience for me to work on this thesis. The completion of this research would not be able without the great help and support from my advisors, committee members and my family. So first of all, I would like to give my appreciation to Professor Shao-Chi Chang and Professor Hao-Chieh Lin, my respectable advisors, for their kind help and guidance throughout the entire period of writing this study. I would not be able to complete this research without their precious advice. Meanwhile, I would also appreciate Professor Yung-Ming Shiu’s encouragement and insightful comments on my proposal and final defense. I would like to also thank everyone at the Institute of International Management and Business Administration, National Cheng Kung University, who has contributed to the completion of this thesis. Finally, I would like to appreciate my family members, who have offered their constant support for my study here and thank them for be always by my side. Abstract Keywords: Personalities, Core self-evaluations, Extraversion, Herding behavior, Individual investors’ performance, Cognitive dissonance, Return, Satisfaction...
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...Rational decision making is tied with a structured or sensible thought process. The theory of rational choice starts with having a set of alternatives by the decision maker in his mind. Most analysts only study a limited set of alternatives that contain the important difference among the alternatives. Such behavior of analysts need attention. Sanglier, M. et al (1994) showed that when different investors received the same information they had their own interpretation of this information. These various interpretations lead to different perception of the signals and therefore created differentiated behaviors. Different behaviors affect decision making of investors and financial markets as every investor would make decision in the way as he received...
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...that they can be effective. There have been debates between both economists and psychologists on how heuristics do. Most of the economists believe in the fact that errors are independent across individual investors. The idea ends up with the equilibrium point and correction. However people mostly share similar heuristics gained from experience. Human mind is not designed solely to make good decisions but also to experience pleasantness. Individuals believe that they are better than they actually are. Also decisions are affected by feelings and mood of decision maker individuals. People can learn from past experiences and failures. However learning is hard and self-deception makes people realize their success more than failures and losses. Many (though not all) of the cognitive biases are stronger for individuals with low cognitive ability or skills than for those with high ability or skills, consistent with biases being genuine errors. A. Heuristic Simplification A.1 Attention/Memory/Ease-of-processing effects Lack of full attention, limitations on memory and processing capacities of individuals forces them to create a selective focus. Psychology of investors is affected from those limitations during decision process. If information is able to attract the individual because of any personal or social reasons –past events, background, emotional life etc. - the information becomes more obvious than the rest. People are not usually able to...
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...that seeks to understand and explain the systematic financial market implications of psychological decision processes. It utilizes knowledge of cognitive psychology, social sciences and anthropology to explain irrational investor behavior that is not being captured by the traditional rational based models. INTRODUCTION Classical investment theories are based on the assumption that investors always act in a manner that maximizes their return. Yet a number of research show that investors are not always so rational. Human become puzzled when the uncertainty regarding investment decision engulfs them. People are not always rational and markets are not always efficient. Behavioral finance explains why individual do not always make the decisions they are expected to make and why markets do not reliably behave as they are expected to behave. Recent research shows that the average investors make decisions based on emotion, not logic; most investor’s buy high on speculations and sale low on panic mood. Psychological studies reveal that the pain of losing money from investment is really three times greater than the joy of earning money. Emotions such as fear and greed often play a pivotal role in investor’s decision; there are also other causes of irrational behavior. It is observed that stock price moves up and down on a daily basis without any change in fundamental of economies. It is also observed that people in the stock market move in herds and this influence stock price. Theoretically...
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...SHRI RAM COLLEGE OF COMMERCE A STUDY ON FACTORS INFLUENCING INDIVIDUAL INVESTOR BEHAVIOUR Project work Paper No. – CH 6.3 (b) (Submitted for Partial Fulfillment Towards Requirement of B.COM (HONS.) Course) Ashvi Mittal 12BC136 12072204129 E-21 2014-15 UNDER THE SUPERVISION OF Miss Ankita Tomar Assistant Professor Department of Commerce Shri Ram College of Commerce University of Delhi 1 DECLARATION BY STUDENT This is to certify that the material embodied in this study entitled “A STUDY ON FACTORS INFLUENCING INDIVIDUAL INVESTOR BEHAVIOUR” is based on my own research work and my indebtedness to other work/publications has been acknowledged at the relevant places. This study has not been submitted elsewhere either wholly or in part for award of any degree. Ashvi Mittal B.Com(H) Section-E 12BC136 2 DECLARATION BY TEACHER INCHARGE This is to certify that the project titled “A STUDY ON FACTORS INFLUENCING INDIVIDUAL INVESTOR BEHAVIOUR” done by Ashvi Mittal is a part of her academic curriculum for the degree of B.Com(H). It has no commercial implication and is done only for academic purpose. Mrs Aruna Jha Miss Ankita Tomar (Teacher in- charge’s name and signature) signature) 3 (Mentor’s name and Signature) ACKNOWLEDGEMENT I feel great pleasure in expressing my gratitude to my mentor Miss Ankita Tomar of Commerce Department, Shri Ram College of...
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...A Critical Analysis of: Investor Irrationality and Self-Defeating Behavior FIN645 Introduction For many years, finance traditionalists have held on to the theory that markets are efficient and that prices correctly reflect the information available to the market as a whole. This has come to be known as the efficient market hypothesis which was originally postulated by Eugene Fama in 1965. After a thorough statistical study of the movements of investment prices Fama concluded that “such movements were essentially random and unpredictable” (Shefrin p.75). Fama pointed out that “in an efficient market, prices correspond to intrinsic (or fundamental) value” (Shefrin p.75). In short, what the theory concludes is that it is impossible to beat the market; that no investor can ever purchase undervalued stocks or sell stocks at inflated prices. The market will always correct itself by incorporating all relevant information into the price of a security thus eliminating an individual investor’s ability to outperform. EMH has grown to become a cornerstone of financial theory and is still applied by many traditionalists when attempting to explain the behavior of financial markets. While there is much evidence in support of this theory there is an equal amount dissention. There are many who argue that there is ample evidence available that counters the central ideas of EMH and demonstrate its shortcomings such as: individuals who have shown that they can consistently...
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...Ethics Oriented Article Review UoP Student RES/351 April 16, 2012 Dr. UoP Professor Ethics Oriented Article Review The following is a summary of unethical business research conduct by Citigroup Inc. and subsequently resulting in trial proceedings for the unethical conduct. The summary will reveal the specific unethical behavior and who were the injured parties in this misconduct. Additionally, insight into how the unethical behavior affected the organization, the individuals, and society. Finally, evidence will be show how this unethical behavior could have been avoided or at a minimum resolved early in the research process. What unethical research behavior was involved? In 2002, Citigroup Inc. was accused of misleading investors. This misconduct was accomplished by the organizations’ research divisions with pressure from the investment sections within the company. The research analysts used biased research to promote the sale of stock that research had shown was not a good investment. The analysts misrepresented the legitimate research because of concern over from backlash from the organizations’ investment bankers. Additionally, the internal pressure from the investment sections to accomplish this misrepresentation was met the reward of bonuses and stock options for the research analysts. The end game in this misrepresentation was to ensure Citigroup, Inc. would have a better bottom line. Numerous examples illustrate the organizations viewpoint of increased...
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...[pic] Ecole Supérieure Libre des Sciences Commerciales Appliquées Review of Literature Behavioral Finance Presented to Dr. Mohamed EL-Hennawy Group Assignment Prepared By Albert Naguib Noha Samir Wael Shams EL-Din Moshira Gamil Marie Zarif January 2012 | TABLE OF CONTENTS | | | |List of Table………………………………………………………………………….. | |List of Figure ………………………………………………………………………… | |List of Abbreviations/Acronyms ……………………………………………………. | |Introduction……………………………………………………………………….. | |2. Appearance of Behavioral Finance…………………………………………………… | |2.1. Important Contributors…………………………………………………. ………. | |3. Behavioral Biases…………………………………………………………………… ...
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...The very nature of our capitalistic society motivates every individual to competitively strive for personal success and prosperity. Competition drives every aspect of business and fuels financial markets to remain strong and healthy, as long as confidence remains strong across all financial sectors. A well functioning market economy is contingent upon the trust of all players in the field to act ethically and responsibly. The current crisis our economy faced and the numerous fraudulent financial scandals have resulted from failures in corporate responsibility and ethical behavior, not failure from the market itself or competition. This failure of corporate responsibility has led to a loss in investor confidence, resulting in the sluggish rebound of our economy from the rocky bottoms of 2008. Competition encourages efficient and innovative financial services, while the stability of every financial sector depends on the trust of every financial institution to adhere to their corporate responsibilities to act ethically and in the best interest of their shareholders. The global recession of 2008 and the collapse of Wall Street is the most indicative example of the how misrepresentative portrayal of financial investments can only deliver exponentially large returns for so long. The perfect storm of factors struck the heart of our economy all at once- the collapse of the housing market coupled with overextension of subprime mortgage loans. While the going was good, the power of...
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...07 / 2012 Course title: Financial Theory and Research (Part 1 – Financial Markets and Asset Pricing) Team Member: Haotian Lin; Nan Bai; Wenyi Gu; Yibo Zang Summary Standard finance (modern portfolio theory), compared with Behavioral finance, is no longer modern: dating back to the late 1950s modern portfolio theory was developed (Statman 2008) Behavioral finance offers alternative explanation for investors and markets. Behavioral finance, which has been a controversial subject and is becoming more widely accepted, is finance from a broader social science perspective including psychology and sociology (Shiller 2003). Behavioral finance helps identify the financial market’s inefficient reaction to public information, which cannot be explained by traditional financial models with assumptions such as expected utility maximization, rational investors, and efficient markets (Ritter 2003; Statman 2008). Statman (2008) compares “normal” investors and rational investors by pointing out the difference that normal investors are reluctant to realize losses since normal investors are affected by cognitive biases and emotions. Statman also compares Behavioral Portfolio Theory and Markowitz mean-variance theory. Another comparison made by Statman is between Behavioral Asset Pricing Model (BAPM) and capital asset pricing model (CAPM), stating that the asset pricing model of standard finance is moving away from CAPM toward Fama and French three-factor model, a model similar to the BAPM...
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...has the Sarbanes-Oxley Act (SOX) made a difference in ethical behavior; the question came to mind; has any law ever succeeded in legislating ethical behavior? The short answer is no, but SOX has lessened the chance of unethical behavior going un-detected. In 2006 top executives at over 150 companies took advantage of lenient reporting policies; where they chose the lowest stock price during a previous quarter, then cashed out at a higher price thereby increasing their profits (Sweeney, 2012). These individuals were caught and this behavior will continue to be detected due to the implementation of SOX. With the passage of SOX and under section 403, which requires executives to notify the U.S. Securities and Exchange Commission (SEC) “of buying or selling stock, including stock options” unethical behavior is lessoning (Sweeney, 2012, para 4). It was determined that the behavior took place before 2002 and it is likely that had SOX not been enacted this behavior would have continued. Paul Regan a forensic accountant stated; “there’s still plenty of fraud. But if we didn’t have Sarbanes-Oxley, the misstatements would be significantly worse” (Sweeney, 2012, para 9). Most experts agree and say that SOX is the most sweeping regulation since the passing of the Secrities Exchange Act of 1934. I would agree with this statement. The unethical behavior of these individuals cost millions of dollars and jobs for American investors. One of the major objectives of SOX was to end self regulation...
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...there is a science behind consumer behavior. Specifically in the financial industry, there are various factors within the environment that drive the behavior and psychology of investors. In fact, whether the consumers consciously know it or not, many companies take these factors into significant consideration when planning and executing the marketing strategy for a brand or product. Factors such as motives, perception, attitudes, personality, family, and social class are the mold for psychological considerations in marketing; while external factors, such as social, political, and ecological also have a fundamental impact on consumer decisions as well. In the financial industry, consumers have historically had a tight grip on the direction of the market based on the trends in the environment around them. Psychological Variables The primary motive for investors is easy; to secure the foundation of a financially sound future for either themselves and/or their family likewise. In some situations, affluent investors are also looking to multiply their millions. The abstract of all situations, however, is driven by the human need for financial gain. Or, is it? Maybe the feeling of “need” is realistically a “want”. Let’s consider some of the other psychological factor of investors, who are essentially, for all intents and purposes of this conversation, the consumer in the world of finance. The cognitive process, attitudes, and emotions that the investor experiences are what lead them...
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...need to reorient the discussion to how this operational efficiency arises. The crux of the debate boils down to whether we should consider investors to be rational, well informed, and homogeneous—the backbone of standard capital markets theory—or potentially irrational, operating with incomplete information, and relying on varying decision rules. The latter characteristics are part and parcel of a relatively newly articulated phenomenon that researchers at the Santa Fe Institute and elsewhere call complex adaptive systems. Why should corporate managers care about how market efficiency arises? In truth, executives can make many corporate finance decisions independent of the means of market efficiency. But if complex adaptive systems do a better job explaining how markets work, there are critical implications for areas such as risk management and investor communications. I Take, for example, the earnings expectations game.1 In a complex adaptive system, the sum is greater than the parts. So it is not possible to understand the stock market by paying attention to individual analysts. Managers who place a disproportionate focus on the perceived desires of these analysts may be managing to the wrong metrics— and ultimately destroying shareholder value. A better appreciation for how markets work will shift management attention away from individual analysts to the market itself, thus capturing the aggregation of many diverse views. Standard capital markets theory still has a lot to...
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...Advantages (the company): 1. Beyond the public offering there are no fixed charges. 2. There is not fixed maturity. 3. Common stock increases the credit worthiness of a firm. 4. Common stock can at times be sold more easily than debt. Issuer Disadvantages (the company): 1. Extends voting rights or control to additional stockholders 2. Gives more owners the right to share income. 3. Initial costs of “underwriting” and distribution are higher than bonds. 4. Changes the debt/equity mix of the firm. 5. Dividends are not deductible form taxable income. (why isn’t dividends a deductible for companies) Investor Advantages (the individual): 1. Participate in growth of firms value 2. Receive dividends (Quarterly income) 3. Limit liability 4. Vote for management/directors Investor Disadvantages (the individual) 1. Participate fully in risk of loss 2. Loss of dividend 3. Worthless paper (Occurs when a company goes bankrupt) Bonds: Are called fixed income securities because they provide a stream of income. This feature is very attractive...
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...Financial Market Definition of 'Financial Market' Broad term describing any marketplace where buyers and sellers participate in the trade of assets such as equities, bonds, currencies and derivatives. Financial markets are typically defined by having transparent pricing, basic regulations on trading, costs and fees and market forces determining the prices of securities that trade. Some financial markets only allow participants that meet certain criteria, which can be based on factors like the amount of money held, the investor's geographical location, knowledge of the markets or the profession of the participant. Investopedia explains 'Financial Market' Financial markets can be found in nearly every nation in the world. Some are very small, with only a few participants, while others – like the New York Stock Exchange (NYSE) and the forex markets – trade trillions of dollars daily. Most financial markets have periods of heavy trading and demand for securities; in these periods, prices may rise above historical norms. The converse is also true – downturns may cause prices to fall past levels of intrinsic value, based on low levels of demand or other macroeconomic forces like tax rates, national production or employment levels. Information transparency is important to increase the confidence of participants and therefore foster an efficient financial marketplace. Financial Markets: Capital Vs. Money Markets ...
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