Previously on Part 1: https://stockthinktank.wixsite.com/home/post/behavioral-finance-and-the-behavior-of-individual-investors-on-the-vietnamese-stock-market-pt-1
Proposing solutions to regulate the behavior of individual investors in the stock market
On the basis of applying the theory of "behavioral finance" to explain the behavior of individual investors on the Vietnamese stock market, the author proposes a number of solutions as follows:
On the side of investors
- Develop a reasonable stock valuation method: In fact, individual investors often have overconfidence about their understanding of valuation methods and forecast market trends. While, the valuation result is only the fair estimate of the appraiser's own. The concept of "real value" in the valuation of securities companies or financial investment consulting companies has made individual investors dependent on this anchor. Therefore, investors need to build for themselves a reasonable stock valuation method, not to be influenced by crowd psychology or other factors.
- Controlling emotional factors in investment: On the stock market, individual investors' decision-making behavior is influenced by emotional factors. Therefore, in order to invest successfully, besides professional knowledge, investors need to control emotions in the process of making financial investment decisions. It is necessary to avoid too much anxiety and stress during the investment process, but also do not be overly confident that you have enough knowledge and experience to face all problems that arise.
- Improve the capacity of individual investors: Individual investors need to build a knowledge base for themselves so that they can self-regulate their behavior, avoiding following the crowd in the market. It is important that each individual investor has a knowledge base, they will be able to self-regulate their behavior. To make the right investment decisions, investors confidently rely on their own analytical abilities, not on the information that the crowd brings.
On the side of policy makers
New research in behavioral finance has provided policymakers with some new solutions by relying on psychology and human behavior to make rational decisions. The following principles can be based on to build a reasonable macro solution for the management of the Vietnamese stock market:
- The principle of "mind of the crowd": Crowd psychology always exists, when investors are forced to make decisions when there is not enough information, they will tend to follow the crowd, especially, they are greatly influenced grown by people with authority, knowledge or people they respect and like. If the behaviors of certain groups of people play an important role, then this should probably go viral. Therefore, policy makers need to see the usefulness, thereby focusing their efforts on creating behavior change on this special group of people, they will help spread useful information.
- The principle of "based on the habits of investors": Most people find it difficult to change their habits. Therefore, policy makers need to consider people's habits when they want to change their behavior, such as: Which habit hinders behavior change, how strong it is, can increase awareness people's consciousness, creating motivation... to take measures to help them change behavior and reinforce new behavior.
- The principle of "feeling of justice affects human behavior": In life, fairness is very important, so policy makers need to consider how people comment on the behavior that they have. Policymakers want change. If the behavior is considered shameful by the investor, it is less effective to issue a penalty to them (because they are embarrassed, they do not do the behavior themselves). If the investor thinks that the behavior is worth doing, then issuing a financial reward does not matter to the investor (because the behavior is worth doing, they still do it). Review should be tied to people's feelings of fairness and care should be exercised in a way that is effective so as not to make people feel that the policy is unfair. Because these things will affect human behavior in the future.
- The principle of "self-regulating behavior": People often feel uncomfortable when they realize that their actions are beyond their values, expectations, etc. When they realize that discomfort, people will try to change their behavior to match expectations within their framework. Therefore, policy makers need to consider the necessity of enacting a policy. Because investors themselves, when they commit to something, they often self-regulate their behavior to perform without reward or punishment.
- Principle of "investors' risk aversion": When issuing a certain form of reward or punishment, policy makers should carefully consider this principle. Because a sanction will be more of a hindrance than a reward when they are of the same magnitude. The sanction will form an incentive for investors to do nothing, to avoid the risk of more loss. Therefore, sanctions should be issued to curb negative behavior of investors.
- The principle of "overconfidence and overreaction of investors": Investors often overestimate the information they have. Overreaction is a type of behavior in which when investors receive a particular information about a security, they have a relatively correct assessment of that information but to a higher degree. Therefore, policy makers should pay attention to the overconfidence and overreaction tendencies of investors as a basis for stabilizing the market.
- The principle "Investors become passive when led by too much information": When there is too much information available in the market, it will cause investors to become passive. Therefore, policy makers should note that investors do not like too much information, because too many options and too much information can overwhelm and lead to a feeling that the information available is not useful.
In short, the behavior of individual investors in the stock market has a great influence on the stable development of the market. Therefore, studying the psychology of individual investors on the Vietnamese stock market in order to find out measures to adjust behavior, in order to eventually stabilize the market, is considered a problem. Research is very much needed in the current period.
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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