Along with the development of Vietnam's stock market, up to now, most securities investors have become more professional, know how to analyze information rationally to make decisions to maximize benefits. mine.
However, there are still many cases where individual investors make irrational and emotional investment decisions, leading to mistakes and losses, thereby inadvertently creating negative impacts for their investors. market. Based on the "behavioral finance" theory, the article explains the behavior of individual investors on the Vietnamese stock market, thereby making recommendations to help investors make better decisions in the future. investment.
An overview of the theory of "Behavioral finance"
Theory of “Behavioral Finance” is a relatively new field of research in Vietnam. This theory was conceived and developed by two American psychologists, Daniel Kahneman and Amos Tversky. In 2002, Daniel Kahneman received the Nobel Prize in Economics for work related to this theory. According to his research, investor behavior is approached based on the following factors:
Experience
Investors (investors) often rely on their own experience to come up with a solution to the problem. Research by Kahneman and Tversky (1982) has proposed three methods of decision-making based on experience, specifically:
- Case-based method: Investors make an assessment of their situation based on similar sample situations that have occurred.
- Availability-based method: Investors rely on available information on the market that they collect to make their investment decisions. The typical situation is also reflected in decision-making based on availability. past experiences that miss many present events, evaluate events individually, not systematically, and take into account their relation to the whole.
- Method based on reference information to make adjustments: According to this method, investors will rely on certain reference information such as amplitude, inflation rate, growth rate... to as a reference point and there is an adjustment around this point to suit the available information at present.
Thus, based on experience, investors can assess the probability of future events quickly and easily. In many cases, when external conditions change frequently and are difficult to predict, it is not feasible to rely on experience, then investors will make decisions based mainly on rules. However, investors often appreciate the effectiveness of simple, easy-to-remember rules... and often apply them when making decisions, which makes the decisions made by investors often do not bring results. results as expected.
Behavioral deviation
Studies in the "Behavioral Finance" theory show that most of the deviations in investor behavior are due to the following main reasons:
Firstly, due to a lack of cognitive understanding, investors are overconfident when making decisions. Overconfidence is the most common psychological behavior in stock investing. It can obscure investors' rationality when predicting the outcome of an investment. Investors who are overconfident will often not consider diversification because they think they have good market predictability. Therefore, they are easily affected by fluctuations in stock valuation as well as the market in general.
Second, investing is based on experience, not on a thorough analysis of factors affecting investment decisions.
Third, investing is based on emotional factors. Successful investors are those who control their emotions to make appropriate decisions. However, there will be times when investors believe that they are a wise and intelligent person. This is a necessary emotional confidence, but sometimes it also brings many risks, especially subjective psychology. This makes them lose money, even "empty hands".
Fourth, investing is based on social interaction. Investors all live in a social environment with mutual interaction of subjects. Social interaction is a relatively strong type of interaction. The reason is because most people are very sociable and have a natural desire to be accepted by a group, rather than to be left out. It is this that explains why investors who trade in the market act irrationally and do not benefit themselves.
Crowd psychology
Crowd investing is the behavior of an investor imitating the actions of other investors or following market movements instead of relying on their own sources of information and investment strategies. Under normal conditions, investors can be very calm and lucid, but there are times when they are overwhelmed by negative emotions when other investors act in a certain common way. Especially when investors are under pressure to make quick decisions without having enough necessary information...
Crowd psychology isn't all bad in all cases, but research is absolutely necessary. Because the root causes of many crises in the world (Tulip crisis, world economic recession, Asian economic crisis...) are related to this mentality.
Applying the theory of "Behavioral finance" to explain individual investor behavior on the Vietnamese stock market
The first type of behavior: Predicting the VN-Index based on the world market
This behavior can be explained by fulcrum-based investment psychology. In this case, individual investors have considered the world stock index as a fulcrum, a reference point, to make predictions about the stock index in Vietnam. For example, when investors watch the Dow Jones increase today, they will think that tomorrow, or the next few days, the VN-Index will also increase, so they will make a decision to buy stocks. , despite the fact that there is no scientific basis for the relationship between the variables in the same direction.
The second type of behavior: Investment decisions based on professional investors
On the Vietnamese stock market, it is a common fact that individual and retail investors tend to invest according to professional investors such as foreign investors and institutional investors. In this case, individual investors have considered foreign investors or institutional investors as a typical situation, capable of properly assessing the development of the market and whether foreign investors or institutional investors make decisions. The purchase decision is certainly based on some credible reason. It is this belief that has motivated domestic investors to carry out investment behaviors according to foreign investors and institutional investors. It is this belief that can make investors run after the psychology of the crowd.
Third type of behavior: Buying and selling decisions based on disclosed information
Investors tend to trust information transmitted from relatives, friends... rather than information from the mass media, because they believe that such information gives them an advantage or a guarantee of success. public, which in turn will influence their investment decisions.
Fourth type of behavior: Investing regardless of good or bad stocks
This behavior can be explained by fulcrum-based investing behavior. It makes investors think that the price of a stock tends to be closely tied to the price changes of other stocks without distinguishing between good and bad stocks. With situations and events that have happened and are kept in mind, investors tend to choose a portfolio that is suitable for that experience, such as the field of work, place of residence, relationship... Not a choice based on thorough and specific analysis.
The fifth type of behavior: Holding a losing stock for too long
This behavior can be explained by cognitive dissonance. This contradiction causes individual investors to decide to hold securities at a loss instead of selling them, because they do not want to admit that it was a wrong investment decision. On the other hand, they still expect that in the future things can change, the price of the stock they hold in the future can increase again, even though the decision to continue holding this stock may lead to an increase in the stock price. their losses.
REFERENCES:
1. Ngo Thi Xuan Binh (2010), Research on behavioral theory in financial investment decision making, Banking Journal, No. 21, November 2010;
2.Nguyen Duc Hien (2012), Doctoral thesis "Investors' behavior on Vietnam's stock market";
3.Ho Quoc Tuan (2007), Behavioral Finance: Research on Applied Psychology in Finance, Economic Development Journal, July 2007 issue;
4.Lucy F.Ackert and Richard Deaves (2013), Behavioral Finance, Economic Publishing House of Ho Chi Minh City. Ho Chi Minh.
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