The efficient market hypothesis is based on the construct that investors are rational and as a consequence stock monetary values are valued rationally, that investors process all available information when doing investing determinations, and maximise expected public-service corporation accurately.
Of recent there has been a batch of literature that has documented observations of anomalousnesss in the stock market ( e.g. January consequence ) .The presence of such anomalousnesss suggests that the implicit in rule of EMH i.e. rational behaviour of investors is non right. It has become evident that in world investors may in fact think and act irrationally ; although these goings from reason are sometimes random they are frequently systematic. This behaviour is explained by a field of survey known as behavioural finance. Behavioral finance is an application of psychological science to finance that considers the thought that investors may at times act less than rationally. It fundamentally explains how investors are influenced by cognitive mistakes and emotions when doing their determinations.
These systematic mistakes and behavioural prejudices that investors portray have serious deductions to both the investors themselves and the market. As a consequence of imperfect reason, there is mispricing of stock that leads to misallocation of resources. Furthermore investors that are inclined to behavioural prejudices when doing investing determinations can make serious injury to their wealth e.g. Barber & A ; Odean ( 2000 ) show that investors who are cocksure have hapless net returns.
What are the factors that affect single investor behaviour?
1.3 Research Aims
In order to turn to the research inquiries posed earlier, the undermentioned aims are established:
To reexamine the different literature watercourses that are relevant to the survey
To develop a profile of sample Malayan single investor in footings of their demographics
To place the aim of investing of a Malayan single investor
To place the behavioural prejudices that affect Malayan investors
To analyze the relationship between investor gender and investor behaviour
1.4 Justification for Study
Initial motive to carry on the survey arose from a demand to hold a deeper apprehension of fiscal determination devising of persons from a behavioural point of position.
Although there has been assorted research done on investor behavioural inclinations most of them were overpoweringly quantitative, and used aggregated market-based informations to explicate such behaviour.
Past surveies analyzing factors impacting single investors behavior tend to hold inconclusive consequences when it comes to placing which factors are most or least influential.
Last, there is a deficiency of research on single investor behaviour in Malaysia.
1.5 Definition of Footings
Individual investor: an person who purchases little sums of securities for him/herself. They are besides known as a little or retail investor.
The overall intent of this survey is to research investor behaviour and the cardinal factors that influence them.In order to accomplish the research aims and to reply the research inquiries, this survey is organized in a figure of different chapters:
Chapter 2 reappraisals current literature and other relevant beginnings that guide our apprehension of single investor behaviour.
Chapter 3 The research methodological analysis and methods utilized are so discussed in item. Stairss taken in transporting out the existent research are outlined along with the relevant information analysis methods used.
Chapter 2 -LITERATURE REVIEW
2.1How do investors act?
Harmonizing to Daniel, et Al. ( 2001 ) , when doing investing determinations investors by and large
make non take part in all plus and security classs, exhibit loss-averse behaviour, behave on position quo, usage past public presentation as an index of future public presentation in stock purchase determinations, trade excessively sharply, do non ever organize efficient portfolios, behave parallel to each other, and are influenced by historical high or low trading stocks.
Investors trade excessively much
Barber and Odean ( 2000 ) examined the trading activity of 66465 families from 1991 to 1996 based on their histories at a price reduction securities firm house. They found out the mean return of investors ( after taking trading costs into history ) in their sample was below the standard return degree. The lower returns are as a consequence of higher dealing costs ( e.g. Odean, 1999 ) .
The inordinate trading of investors is attributed to overconfidence: investors overestimate their information cognition abilities and future results. Harmonizing to Larrick et Al ( 2007 ) persons who believe they are better than norm are besides more likely to be cocksure. Certitude is a job when persons do n’t acknowledge their restrictions and therefore, make faulty determinations based on incorrect premises. There are several factors that contribute to overconfidence viz. : the semblance of control ( The inclination of people to believe they have influence over the result of unmanageable events ) , semblance of cognition ( People believe that they know more than they really do ) every bit good as self ascription prejudice ( imputing one ‘s successes to one ‘s ain abilities, even when such ascription is indefensible ) .
Investors frequently do non take part in all plus and security classs
This can be attributed to the fact that people prefer and believe in what is familiar to them. In puting, most investors tend to take to put in stocks of companies that they know instead than another even if the 2nd might be of better value. This is related to acquaintance prejudice. Familiarity prejudice can be seen in deficiency of variegation, penchant for local stocks, penchant for professional propinquity and penchant for cultural propinquity. The behaviour is a job because in purchasing what is familiar there is a inclination to undervalue the hazard of the investing. Investors tend to purchase a disproportional sum of securities from their place state, despite good documented additions from international variegation, this is known as place prejudice e.g. , Daniel et Al ( 2001 ) . This is besides the instance for U.S. investing directors who exhibit a strong penchant for houses that have local headquarter in their domestic portfolios Coval and Moskowitz ( 1999 ) .a penchant for professional propinquity is evidenced by Huberman ( 1999 ) who found out that employees tend to put in their ain house ‘s stocks and comprehend this stock as low hazard.
Individual investors exhibit loss-averse behaviour
Loss antipathy refers to the fact that for most people, the fright of losing money is greater than the joy of potentially doing money. That is we prefer to avoid loss about every bit twice every bit much as geting additions. As noted by Daniel et Al. ( 2001 ) single investors tend to be more likely to sell their victors than their losingss ( temperament consequence ) . They hold onto their losingss in hopes that monetary values will finally retrieve. An deduction of loss antipathy is that persons have a strong inclination to stay at the position quo, because the disadvantages of go forthing it loom larger than advantages ( position quo bias ) .
Investors behavior is parallel to each other
This is known as herding ; assorted researches have been able to supply grounds of the being of such behaviour. Harmonizing to Daniel et Al. ( 2002 ) , investors tend to follow the consensus behaviour, irrespective of whether the determinations are right or incorrect. This may be due to the fact that we have a belief that all people could non be incorrect. In a survey of crisis related behaviour in the Jakarta stock exchange utilizing day-to-day trade informations from January 1997- December 1999 ( monthly informations ) Bowe and Domuta ( 2004 ) found grounds of investor crowding. They besides found out that foreign investors herd more than locals, foreign herding additions during the crisis, while domestic crowding cut downing from the oncoming of the crisis.
Investors are influenced by historical high or low trading stocks
Daniel et Al. ( 2001 ) suggests that investors may do premise of how the market works based upon irrelevant historical values which is slightly tantamount to doing determinations based upon mental accounting with regard to arbitrary mention points.
Investors use past public presentation as an index of future public presentation in stock purchase determinations
Harmonizing to Daniel et Al. ( 2001 ) investors naively extrapolate past monetary value tendencies even though empirical grounds suggests that there is small or no continuity in performance.This trust on past public presentation implies that investors fail to take expected returns and hazard into history. This behaviour is explained by representativeness and handiness heuristics. Representativeness is defined as the inclination to irrationally impute one feature to connote another, while handiness heuristic is the inclination to do determinations based on readily available information.
2.2What factors affect single investor behaviour?
In a survey analyzing the factors that influence Grecian investor behavior Maditinos et Al. ( 2007 ) used both questionnaire and a series of interviews. They found out that single investors rely more on the media and noise in the market while professional investors rely more on proficient analysis and portfolio analysis when doing investing determinations.
These findings are contrary to Merikas et Al. ( 2003 ) who carried out a mail study in analyzing factors that affect Grecian investor behaviour and employed frequence analysis and factor analysis. The consequences of their survey indicated that when doing determinations investor investors employ diverse standards although a authoritative wealth maximization standard is considered really influential whilst newspaper or media is considered least likely to act upon investor determinations.
Based on the aforesaid surveies it is evident that investors have wide position on comparative importance of factors that affect their determination devising.
Sultana ( 2010 ) employed a modified questionnaire which included factors like spiritual beliefs every bit good as creative activity of organized fiscal markets in analyzing factors that influenced investor behaviour in the UAE. Their findings were consistent with Merikas et Al. ( 2003 ) in that a mix of fiscal and non-financial influences were discovered. Religious beliefs and creative activity of good organized fiscal markets were one of the least influential factors.
2.2.1Demographics and investor behaviour
There are several surveies that have assessed the relationship between demographic factors and investor behaviour.
Baber and Odean ( 2001 ) utilizing history informations for over 35,000 families from a big price reduction securities firm analyzed the common stock investings of work forces and adult females from February 1991 through January 1997 in order to prove if work forces are more cocksure than adult females. They found out that work forces trade 45 per centum more than adult females. Trading reduces work forces ‘s cyberspace returns by 2.65 per centum points a twelvemonth as opposed to 1.72 per centum points for adult females. This suggests that work forces are so more cocksure than adult females.
In a survey measuring the investor behaviour of Indians, Sultana ( 2010 ) carried out a study ( questionnaire ) with a sample size of 150.He documented that gender and hazard tolerance are independent, and that the older an investor the less hazard tolerant. He besides assets that the older the investor the better his/her public presentation seemed, this is in contrary to Rui et Al ( 2004 ) who in analyzing history informations from China and found that investor edification does non needfully extenuate behavioural prejudices nor improve trading public presentation.
Merrill Lynch investing directors ( 2005 ) documented adult females make fewer investing errors than work forces and do them less frequently – despite the fact that, on norm, they tend to cognize less about puting and bask puting less than work forces.
Table 1.1 nowadayss a sum-up of a set of 20 empirical surveies conducted between 1999 and 2010, which includes state of survey, methodological analysis, aims and findings of the research.
Table 1.1 A brief model of the related finance literature on investor behavior
Al Tamimi H. ( 2005 )
What are the factors that influence UAE investors behavior?
Barber & A ; Odean ( 2000 )
Analyze the Investment perfomance of common stocks?
Barber & A ; Odean ( 2001 )
does overconfidence take to inordinate trading?
Chen G. , Nofsinger R.J. , Kim K.A. , Rui M.O. ( 2004 )
How does investor experience influence investor behaviour and trading public presentation?
Daniel, K. , Hirshleifer, D. , & A ; Teoh H, S. ( 2001 ) .
how psychological prejudices affect investor behaviour and monetary values
De Bondt, M.F.W ( 1998 )
How make little single investors trade stocks
Domuta D. & A ; Bowe M.
( 2003 )
what are the investing behaviour of foreign and domestic investors during the fiscal crisis
Gebka B. , Bohl T. M. & A ; Goodfellow C. ( 2009 )
Is there crowding in the Polish stock market
Grinblatt M. & A ; Keloharju M. ( 2000 )
Which investor groups exhibit impulse and contrarian behaviour?
Huberman, G. , ( 1999 )
Do people prefer to put in the familiar?
Merikas, A. A. , Merikas, G. A. , Vozikis, S. G. , & A ; Prasad, D. ( 2003 )
# What are the factors that influence investing picks of persons?
# Factor analysis-Orthogonal rotary motion
Merrill Lynch Investment Managers. ( 2005 )
Does gender influence investor behaviour
Nofsinger R.J. & A ; Kim K.A. ( 2007 )
Are single puting behaviours related to market conditions?
Screening and arrested development analysis
Do investors merchandise excessively much?
To measure the fund choice behaviour of MF investors
Shive.S ( 2010 )
Does societal influence affect the single investors merchandising
( 2010 )
# What is the influence of demographic factors ( age and gender ) on hazard tolerance?
# Chi square trial of independency
Vissing-Jorgensen A. ( 2003 )
Does “ Irrationality ” Disappear With Wealth
Wei S. & A ; Kim W. ( 2002 )
The trading behaviour of foreign portfolio investors in Korea before and during the currency crisis
Maditinos D.I, Sevic Z. & A ; Theriou N. G.
What methods and techniques are used by Grecian investors in doing investing determinations
From the reappraisal of the literature on behavioural finance since the 1999, which is summarized in table 1, it is clear that the recent grounds available suggests that investors are non rational, as many fiscal economic experts believed and maintained. When doing investing determinations investors are susceptible to cognitive and emotional prejudices: they think they are better determination shapers than they truly are, they are loss averse, merchandise excessively much, follow the crowd, set excessively much weight on recent experiences, prefer to put in companies they know or think they know.
There are assorted factors that have been documented to act upon investor behaviour. It is evident that investors do non trust on a individual attack but on many classs of factors. There is some incompatibility when it comes to the influence of media on investor behaviour, Maditinos et Al. ( 2007 ) and Merikas et Al. ( 2003 ) papers contrasting thoughts of the comparative importance of media on investor ‘s determination although both were analyzing Grecian single investors. This may be because the consequences reported are sensitive to the methods employed ( interview & A ; questionnaire versus questionnaire merely ) besides the twelvemonth of survey is different. Besides it is interesting to observe that although UAE is a Muslim state investors were documented to non be influenced by spiritual grounds when make investing picks
It has besides been made evident that there are differences in demographic variables consequence on investing behaviour.
Chapter 3 – Methodology
The chief purpose of this survey is to critically analyze and analyse the factors that influence investor behaviour, with focal point of single retail investors in Malaysia. This chapter provides the theoretical model of the survey that is meant to supply more lucidity about the relationship between the variables employed in the survey. It farther provides a description and hypotheses development that clearly states sets of hypotheses to be tested. The research attack has besides been discussed to explicate what sort of attack was used to transport out this research. This chapter besides gives an account of the design of the questionnaire that was used. Finally, there is besides the treatment about the statistical belongingss of the informations along with the relevant information analysis techniques used.
3.2 Theoretical model
Personal fiscal demands
3.3 Hypothesis development
To happen out the factors that affect investor a questionnaire was developed and administered. The study was administered as a paper version to retail investors in the Malayan stock market. The figure of distributed questionnaires was 160.
The questionnaire includes closed ended inquiries and scaled-response inquiries look intoing the dependant variable and the independent variables of the research.
The questionnaire was divided into two subdivisions that are subdivision A and B. In the first subdivision of the questionnaire respondents were asked to finish inquiries refering their personal background information. The demographic information included gender, age, race, matrimonial position, educational degree.annual personal income, employment position, old ages of investing experience and figure of people the respondent was responsible for.
The 2nd subdivision of the questionnaire encompasses 2 bomber parts runing from portion I to portion two. In portion I the respondents are asked the aim behind their investing every bit good as asked to measure the importance of 26 points, as identified from literature Merikas et Al. ( 2004 ) that influenced their investing determinations. Responses were marked on a 5 point likert graduated table. In order to asses the investor behavioural prejudice classs: certitude, crowding, loss antipathy in portion ii the respondents were asked to tag their responses on a 5 point likert graduated table anchored by “ strongly disagree ” ( 1 ) to “ strongly hold ” ( 5 ) .Each behavioural prejudice had a upper limit of 5 inquiries in the questionnaire.
3.6 Statistical belongingss
Sampling is the procedure of obtaining information from a subset of a larger group, statistical representative of the whole population. The consequences from the sample are so used to do estimations of the features and positions of the larger group.
For the intent of this survey, simple random sampling is used as the trying method to analyse the findings. In simple random sampling, every component in the population has a known and equal opportunity of being selected as a topic. Simple random sampling is used because it has the least prejudice and offers the most generalizability.
In taking a sample size one has to guarantee that the chosen sample size is both valid and dependable, this will enable one to generalise the findings from the sample to the population. Sample sizes larger than 30 and less than 500 have been deemed appropriate for most research. Besides if samples are to be divided into subsamples for probe a minimal sample size of 30 for each class is necessary. In a multivariate research, the sample size should be several times every bit big as the figure of variables in the survey i.e. sooner 10 times or more.
Questionnaire design issues
Cogency of study instruments
Cogency refers to the grade to which a survey accurately reflects or assesses the specific construct that the research worker is trying to step. It is concerned with whether the right construct is measured.
There are several types of cogency trials that can be conducted to asseverate the goodness of step of informations viz. : content ( ensures that the points on the trial represent the full scope of possible points the trial should cover ) . , standard ( the trial differentiates persons on a standard it is expected to foretell ) and concept cogency ( shows how good the trial scores fit the theories in which the trials where based. Construct cogency can be established through correlativity analysis and factor analysis.
Dependability of study instruments
Dependability refers to the extent to which a trial produces the same consequence on repeated tests i.e. whatever a trial measures, it measures it systematically. Reliability is concerned with both stableness and consistence of the trial.
There are several trials of cogency that can be used viz. : trial retest dependability ( the grade to which a trial, given at different times, gives the same consequences ) , parallel signifier dependability ( the grade to which the consequences of two trials constructed in the same manner from the same content sphere given at the same clip remains the same ) and internal consistence dependability ( the grade to which a trial points that measure the same concept give the same consequences ) .
3.7 Statistical trials
Good of step
In measuring the cogency of the questionnaire confirmatory factor analysis will be used. Factor analysis is used to find whether points are tapping into the same concept. During factor analysis, factors with an Eigen value of more than one are retained for farther analysis. To cut down the job of cross burden, if the differences of burdens of any point across factors were less than 0.50 than the points will be deleted.
In order to measure the dependability of the trial, Cronbach ‘s alpha coefficient analysis will be used. The Cronbach ‘s alpha determines the internal consistence or mean intercorrelations of points mensurating the same construct. The closer the Cronbach ‘s alpha to 1, the higher the internal consistence dependability, a value of 0.6 and above is considered dependable.
Trial of relationship
To analyze if there is a relationship between the factors and investor behaviour, the qi square trial will be conducted at 5 % significance level.In order to measure the way and strength of the relationship between investor behaviour and factors named the spearman correlativity trial will be conducted.the appraisal of the correlativity at this point gives an early indicant of what to anticipate from the multivariate analysis.