Motivating more individual inventors to emerging stock market the case in viet nam

Electronic copy available at: https://ssrn.com/abstract=2923927Thai Minh Trang Phung1, Minh Tuan Nguyen2, Ngoc Khuong Mai3 MOTIVATING MORE INDIVIDUAL INVESTORS TO EMERGING STOCK MARKETS:

Electronic copy available at: https://ssrn.com/abstract=2923927

Thai Minh Trang Phung1, Minh Tuan Nguyen2, Ngoc Khuong Mai3

MOTIVATING MORE INDIVIDUAL INVESTORS

TO EMERGING STOCK MARKETS:

THE CASE OF VIETNAM

The study proposes solutions on attracting more individual investors to participate at Vietnam stock market The study employs qualitative and quantitative approaches including indepth inter-views with 8 investors in Ho Chi Minh City and Ha Noi Capital, who each have 10 years of expe-rience in investing stocks in Vietnam; a group discussion to 6 brokerage managers working for top securities corporations; and a survey of 200 individual investors trading at Vietnam stock market The results obtained helped the authors to develop detailed recommendations for the related public institutions, securities corporations and individual investors.

Keywords: loss aversion; regret aversion; Vietnam stock market; individual investors.

Peer-reviewed, approved and placed: 28.07.2016.

Таі Мінь Транг Фунг, Мінь Туань Нгуєн, Нгок Хуонг Маі

МОТИВУВАННЯ ПРИВАТНИХ ІНВЕСТОРІВ ДО УЧАСТІ

НА ФОНДОВИХ РИНКАХ, ЩО РОЗВИВАЮТЬСЯ:

НА ПРИКЛАДІ В’ЄТНАМУ

У статті запропоновано варіанти, як можна залучити більше приватних інвесторів

до участі на фондовому ринку В’єтнаму У дослідженні використано як якісні, так і кіль-кісні підходи, зокрема: інтерв’ю з 8 інвесторами в Хошиміні та Ханої (всі з як мінімум десятирічним досвідом інвестування у В’єтнамі); групову дискусію з 6 маклерами, що представляють провідні фондові корпорації; а також опитування 200 приватних інвесто-рів, що торгують на фондовому ринку В’єтнаму Отримані таким чином результати допомогли авторам розробити детальні рекомендації для відповідних державних струк-тур, фондових компаній та приватних інвесторів.

Ключові слова: несприйняття збитків; несприйняття невірних рішень; фондовий ринок

В’єтнаму; приватні інвестори.

Рис 1 Табл 3 Літ 24.

Таи Минь Транг Фунг, Минь Туань Нгуен, Нгок Хуонг Маи

МОТИВИРОВАНИЕ ЧАСТНЫХ ИНВЕСТОРОВ К УЧАСТИЮ

НА РАЗВИВАЮЩИХСЯ ФОНДОВЫХ РЫНКАХ:

НА ПРИМЕРЕ ВЬЕТНАМА

В статье предложены варианты, как можно привлечь больше частных инвесторов к участию на фондовом рынке Вьетнама В исследовании использованы как качественные, так и количественные подходы, в частности: интервью с 8 инвесторами в Хошимине и Ханое (все с как минимум десятилетним опытом инвестирования во Вьетнаме); группо-вую дискуссию с 6 маклерами, представляющими ведущие фондовые корпорации; а также опрос 200 частных инвесторов, торгующих на фондовом рынке Вьетнама Полученные таким образом результаты помогли авторам разработать детальные рекомендации для соответствующих государственных структур, фондовых компаний и частных инвесто-ров.

Ключевые слова: неприятие убытков; неприятие неправильных решений; фондовый рынок

Вьетнама; частные инвесторы.

©Thai Minh Trang Phung, Minh Tuan Nguyen, Ngoc Khuong Mai, 2017

1

Corresponding author; Hoa Sen University, Ho Chi Minh City, Vietnam.

2

School of Business Administration, International University, Vietnam National University, Ho Chi Minh City, Vietnam.

3

School of Business Administration, International University, Vietnam National University, Ho Chi Minh City, Vietnam.

Introduction Stock market is the key financial institution of a market economy.

It is a connection bridge between capital supply and demand within market economy

A healthy and effective stock market can set up premises to exploit economic poten-tials, attract, and distribute capital effectively and efficiently In order to help Vietnam’s stock market stabilize, sustain, and develop, it is very important to protect investors’ rights, especially Vietnamese individual investors because they have opened 1,552 mln accounts representing 99.57% domestic investors Nonetheless, there is only 1.72% of Vietnam population (more than 90 mln) who participate at the stock market, thus 98.28% of Vietnam population still stays away In other words, we still have a lot of room to boost Vietnam’s stock market while counting on domestic indi-vidual investors

Since the establishment in 2000, Vietnam’s stock market has experienced vari-ous up-and-downs From 2004 to 2006, Vietnam’s stock market had an upward trend Market prices for almost all types of stocks increased dramatically regardless their financial indicators In 2006, the stock "fever" reached its peak Vietnam became one of the most booming stock markets with the peak of 600 in April 2006 At that time, different investors purchased a great deal of stocks without prudential consider-ation of companies’ performance However, this trend could not sustain and from June 12th, 2006 VN-Index moved downward for the next 7 consecutive trading ses-sions On July 21st, 2006 VN-index receded to its valley of 487.86 before bouncing back to 751.77 in the last trading session of 2006 On March 12th, 2007, VN-Index reached its highest record of 1170.67 After this day, VN-Index gradually declined to 927.02 in the last trading session of 2007 From 2008, VN-Index fluctuated but the overall trend was downward Majority of foreign investors turned into net sellers This trend remained unchanged in 2009 On February 24th, 2009, VN-Index fell into its valley of 234.66, but on October 23rd, 2009, VN-Index reached another pinnacle of 633.21 In 2010, VN-Index fluctuated from 517.05 in the first trading session to 484.66 in the last trading session of the year The downward trend continued into

2011, in which VN-Index dropped to 351.55 in the last trading session of the year The year 2012 came into investors’ minds with the notorious problem of August 21st, which brought Vietnam’s stock market into red This event triggered a new phase in Vietnam’s stock market development where rumors could significantly influence prices VN-Index increased by 21.97% in 2013 Vietnam’s stock market closed its last trading session with VN-Index of 504.63 In 2015, VN-Index increased by 6.1%, while HNX-Index has decreased by 3.6% in comparison with the last trading session

in The overall picture looks more gloomy comparing with the period of 2013–2014 where VN-Index increased by 8.13% and HNX-Index soared by 22.32% (ndh.vn) However, what has happened at the stock market is contrary to positive macroeco-nomic development

Based on the historical analysis of Vietnam’s stock market and the potential con-tribution of domestic individual investors it is very important to develop measures to attract more individual domestic investors If we can bring confidence of individual domestic investors in Vietnam’s volatile stock market, we can contribute to healthy and sustainable development of Vietnam’s stock market

Literature review Financial investment decisions are an indispensable part in

practice of any household’s financial management Good financial decisions usually

АКТУАЛЬНІ ПРОБЛЕМИ ЕКОНОМІКИ №2(188), 2017

lead to financial satisfaction and boost family’s standard of living, while poor deci-sions lead to dissatisfaction and downgrading quality of life However, people often do not make decisions based on proper reasoning, but they are steered more by psycho-logical factors When they are in good moods, they tend to be too optimistic in eval-uation process They also turn into too defensive when in bad mentality This prob-lem becomes more severe with the increase in quantity and complexity of available financial products, which are beyond the knowledge of ordinary people Hence, the process of how people make financial decisions becomes quite puzzling and affected

by rules of thumb and biases (Engelberg and Sjoberg, 2006; Lovric et al., 2008) Traditional financial management exposes its limitation to identify key determinants

in investment decisions In general, individual investors do not always go after ration-ality in financial decision making

Why don’t individual investors participate at stock markets? L Guiso et al (2008) suggested the lack of trust as the key determinant Perception of the risk of being cheated is consolidated from the objective characteristics of stocks and the traits

of an investor More trusting individual investors tend to buy more stock and vice versa M.V Rooij et al (2011) discovered a positive relationship between financial lit-eracy and stock market participation The majority of individual investors understand only fundamental concepts, and financial knowledge can influence how financial decisions are made Media also plays a very important role in stock markets Unusually high or low media pessimism forecasts high trading volume (Tetlock, 2007) B.M Barber and T Odean (2007) verified that individual investors are net buy-ers of attention The overload of information at the market about potentially afford-able stock can drive individual investors out of rationality when they browse a variety

of stocks to buy Investors often first determine a choice set which draws their atten-tion Then their preferences set in to determine choice after attenatten-tion In addition, investors are prone to buy and sell stocks with early names in the alphabetical order (Jacobs and Hillert, 2016) In other words, early alphabet stocks tend to move faster than late alphabet stock, and alphabeticity can influence stock price Firm advertis-ing can lure investors’ attention and affect short-term stock returns (Lou, 2014) An increase in advertising usually gives rise to retail buying and exceptional stock returns Nonetheless, this is often accompanied by lower future returns Weather can also influence individual investors’ trading at stock markets (Schmittmann et al., 2015) Investor sentiment which is measured as the ratio between buying and selling is

high-er on the days with good weathhigh-er In addition, individual investors tend to trade more

on the days with bad weather This can be explained as there are more appealing activ-ities which draw attention of individual investors on good weather days

More importantly, behavioral finance is also concerned in financial investment and considered as "a relatively new but quickly expanding filed that seeks to provide explanations for people’s economic decisions by combining behavioral and cognitive psychological theory with conventional economics and finance" (Baker and Nofsinger, 2010: 3) Behavioral finance is rooted in cognitive psychology and to some extent in neuroscience, especially focuses on how decisions are actually made, whereas traditional finance founded on mathematical constructs of expected utility maximization and market efficiency, emphasizes how decisions should be made nor-mative (Yazdipour and Howard, 2010) The efficient market hypothesis assumes that

markets make rational and unbiased future prediction while behavioral finance assumes that, under some circumstances, financial markets are informationally inef-ficient (Ritter, 2003) Prevalently, prospect theory developed by D Kahneman and

A Tversky (1974, 1979) is the theory of average behavior that "theorizes how an indi-vidual or group of indiindi-viduals behaves, on average, in a world of uncertainty" (Baker and Nofsinger, 2010: 191) Behavioral biases related to the prospect theory include loss aversion, regret aversion, mental accounting and self-control (Kahneman and Tversky, 1974, 1979)

Loss aversion and regret aversion are part of the original prospect theory Loss aversion shows that people felt a stronger impulse to prevent losses than to obtain gains; particularly, when investors made a loss, their pain was twofold against their pleasure when making a gain (Kahneman and Tversky, 1979) In fact, loss aversion is

a vital concept in psychology that receives a noticeable interest in analyzing

econom-ic situations Facing loss aversion, one was unaware of taking more risks than one would and kept unbalanced portfolios (Kahneman and Tversky, 1979) Regret aver-sion bias is " a more or less painful cognitive and emotional state of feeling sorry for misfortunes, limitations, losses, transgressions, shortcomings or mistakes" (Landman, 1993: 36) Regret aversion is represented not just the pain of financial loss, but also painful feelings for the decision that makes loss increase more (Brabazon, 2000: 4) More specifically, regret aversion can cause investors firstly be too prudent in their decisions thereafter; secondly, be ashamed away excessively from the markets which have recently decreased; thirdly, keep onto losing positions or win-ning positions for too long; fourthly, make them become herding investors; finally, prefer stocks of own designated good companies (Pompian, 2006)

Some authors also suggest avoiding loss or regret aversion such as "let winners run and cut losses" (Kahneman and Riepe, 1998) or discipline trading rules that never change (Baker and Ricciardi, 2014) Particularly, everyone wins a few and loses a few

at a given period, but in the long run, they will come out ahead (Kahneman and Riepe, 1998) In other words, M.M Pompian (2006) makes the following recom-mendations: not to hold losing stocks for too long and use a stop loss rule; not to sell winners too early and use a stop profit rule; not to hold onto losing investments in companies which are in serious trouble; not to keep unbalanced portfolios; particu-larly, understanding standard deviation, credit rating, buy/sell/hold ratings, benefits

of asset allocation and diversification is critical for investors J Montier and G.E Strategy (2002) also emphasize that investors need to assess whether an invest-ment still has good future prospects and suits current circumstances For the regret aversion bias, some researchers emphasize on trading rules: take profit and cut losses effectively (Kahneman and Riepe, 1998; Baker and Ricciardi, 2014) or it is best to cut losses and move on (Pompian, 2006) Apparently, investors should admit loss, con-front propensities for regret and overcome the reluctance to realize losses; investors should buy low, sell high and recognize that the first loss is the best loss; outcomes of some other flyers that have been taken in the past; the long-term benefits of adding risky assets to a portfolio is essential (Kahneman and Riepe, 1998; Pompian, 2006; Baker and Ricciardi, 2014)

Based on the abovementioned problems and causes, the authors have conducted several indepth interviews to identify solutions on how to draw more individual

investors into Vietnam’s stock market Bearing in mind that the abovementioned researches were conducted at foreign stock markets, we can see whether there is a good match between the solutions suggested for an emerging stock market and prob-lems/causes at older markets

From the indepth interviews and group discussions, the investors and financial advisors stated that loss aversion and regret aversion were mostly paid attention when making decisions on investment Hence, with the aim of rechecking these behavioral biases which affected investors’ investment intention, the study proposes two hypotheses as follows:

H1: Individual investors’ loss aversion affects stock investment intention at Vietnam stock market.

H2: Individual investors’ regret aversion affects stock investment intention at Vietnam stock market.

Methodology This eight-month study employed three research techniques

including indepth interviews, group discussions, and a survey First, indepth inter-views were conducted with 8 investors who have at least 10 years of experience at the stock market The objective of these interviews was to explore the key factors which stimulate investors to participate at Vietnam stock market We contacted reception-ists in securities corporations to ask for a meeting with a brokerage manager If accepted, we could set up appointments to present our research objectives to broker-age manbroker-agers If we successfully persuaded brokerbroker-age manbroker-agers, we could receive the lists of private investors who own at least 10 year investment experiences Then, we contacted these private investors randomly to set up appointments If agreed, we had individual face-to-face meetings which often last around 3 hours All interviews were fully recorded

Second, the author organized a group discussion and invited 6 brokerage ma-nagers who have acted as investors and financial advisors These 6 mama-nagers have worked for prestige securities corporations in Vietnam including Ho Chi Minh City Securities Corporation, Rong Viet Securities Corporation, Bao Viet Securities Corporation and Investment Corporation A group discussion lasted 4 hours The purpose of this discussion was to confirm the key factors proposed by investors and to gather suggestions for the existing problems

Third, we sent questionnaires to 230 individual investors who have been active at Vietnam stock market The questionnaire used five-point Likert scales (1 = totally disagree and 5 = totally agree) of 8 items of Loss Aversion, 5 items of Regret Aversion, and 6 items of Investment Intention Loss Aversion, Regret Aversion were adapted from N.M Waweru et al (2008), and Investment Intention from W.B Dodds et al (1991) and M Soderlund and N Ohman (2003) Back we obtained 200 valid responses

Finally, the data collected were analyzed using SPSS 22.0 For the reliability test and EFA, J.F Hair et al (2014) suggests that Cronbach’s alpha should be from 0.6 Besides, KMO and Bartlett’s test should be more than 0.6 and the accepted signifi-cant level (p) less than 0.05 Initial Eigenvalue should be greater than one and cumu-lative percentage – no less than 50% Factor loadings of the items on a factor are greater than 0.3, the corrected item-total correlation index is 0.3 and the rotation sums of squared loadings is suggested to be more than 50%

Results

1 The respondents’ profiles (Table 1)

Table 1 Summary of respondents’ characteristics

with the highest percentage, authors’

2 EFA results We ran exploratory factor analysis (EFA) for Loss Aversion and

Regret Aversion Two components, namely Regret Aversion and Loss Aversion were extracted and explained 64.6% of the total variance Regret Aversion (REGRET) consisted of REGRET1, REGRET3 and LOSS8, having Cronbach’s alpha of 0.620 Loss Aversion (LOSS) was made up of LOSS3 and LOSS4, having Cronbach’s alpha

of 0.684 We ran EFA for the dependent variable of Investment Intention INTEND1, INTEND2, INTEND3, INTEND4, INTEND5 and INTEND6 were extracted into one group named INTEND with the Cronbach’s alpha of 0.923 to explain 72.3% of the total variance Details are shown in Table 2

Table 2 Dependent and independent variables, authors’

3 Correlations of variables (Table 3).

As Table 3 presented, the mean of intention at 3.83 indicated that most investors intended to invest in stocks next time Mean of loss aversion at 3.36 and regret

There is a high probability I will invest shares later 876

I keep stocks that decreased in value for a long time 778

I keep the stocks that decreased in value and I don‘t sell them 749

I avoid selling shares that have decreased in value and readily

I feel nervous when there are large paper losses (price drops) in

I am more concerned about a large loss in my stock than

sion at 3.05, show that most investors were averse to loss and regret their decisions on investments

Table 3 Correlations between variables in the research model, authors’

4 Results of the regression analysis:

Investment Intention = 3.928 + 0.173 Loss Aversion – 0.223 Regret Aversion.

The above equation shows that Loss Aversion positively influences Investment Intention but Regret Aversion negatively influences Investment Intention

Discussion and recommendations Through the indepth interviews and group

dis-cussion, the study explores the roles of the government in attracting more investors to Vietnam stock market Recently, the government has improved Vietnamese securities law Specifically, there were big policies promulgated in 2015 such as decree "60/ND-CP" which instructed securities law; "40/ND-"60/ND-CP" about derivatives; circular 08 and regulations In general, the government has paid attention to motivate investors to the stock market and have benefits for them However, the government is more

interest-ed in interaction between two stocks markets in Vietnam such as HOSE and HAS, expanding kinds of financial products, increasing the quality of listed companies, applying securities courses in universities and colleges officially, and creating a fresh start to investors Securities corporations have many train courses on investment too and update new policies timely

Additionally, through indepth interviews and a group discussion, the study explores the behavioral bias including loss aversion and regret aversion related to decisions on investments This result is consistent with E Engelberg and L Sjoberg (2006), M Lovric et al (2008), and L Guiso et al (2008) Additionally, the study mentiones investment knowledge when investing in stocks same to the ideas of M.V Rooij et al (2011)

Two hypotheses proposed were satisfied with the empirical research, indepth interviews and a group discussion Surprisingly, the averser to loss the investors are, the more likely they invest in stocks A person felt nervous incurring large losses in his portfolio or he was more sensitive toward suffering a considerable loss than missing a substantial gain In contrast, the more afraid of regret investors were, the less likely they could invest in stocks Individuals kept stocks that decreased in value for a long time and did not sell these shares or investors avoided selling shares that had decreased in value and readily sold shares that had increased in value

In the group discussion, financial advisors recommended on how to avoid loss aversion and regret aversion These recommendations were similar to those in (Kahneman and Riepe, 1998; Pompian, 2006; Parker, 2013; Baker and Ricciardi, 2014) To prevent negative results from loss aversion, investors should establish own rules including cutting loss and realizing profit When dealing with loss, assessing the

* significance at p < 0.05

whole portfolio in which one was able to be sold soon, one was allowed to be held for

a long term, especially, considering final returns of the portfolio were so important More noticeably, investors had to feel calm to find solutions and did not "throw it away" After cutting loss, if market price was in a sharp decline, investors would rebuy this stock due to potential profit Investors should have considered loss as a lesson referred to own experience more than a severe failure Interestingly, sharing problems with their friend and investment teams made everyone less sad and more pleased

In addition, investors should not be regretful for selling stocks too early while its price had still gone up thereafter or holding stocks too long while its price had declined sharply later Significantly, everyone did not compare own profit with other investors’ one because of different structures and opportunities, e.g., one could earn higher profit, more than 50%, even 100% on the initial investment capital because its product was a special product and sold in special circumstances In the case when stock price was increasing, investors only sold when price was declining to 10–15% comparing with the peak point of this stock price This decision helped avoid the regrettable Additionally, if actual returns on the stock exceeded the expected returns

or profit achieved from other trading segments such as real estate, interest rate for bank deposit, investors should have liquidate because it met their expectation, satis-faction and helped avoid regret aversion In practice, it was hard to buy stocks at a floor price and expected to sell it at a ceiling price Therefore, investors accepted this degree as planned

Recommendations to Vietnamese government, securities corporations and investors:

For Vietnamese government and State Securities Commission of Vietnam (SSC): the

Vietnamese stock market was founded 15 years ago and is an emerging market at pres-ent First, it is necessary to have interaction between Ho Chi Minh City stock market (HOSE) and Ha Noi stock market (HAS) to provide information timely to the pub-lic Second, it is needed to add more financial products, e.g derivatives, swaps, indexes, exchanged products or accept and allow startup businesses which could raise funds and be listed Third, it is essential to expand securities market which they are somewhat similar to supermarkets or entertainment domains or good playgrounds since these places would make equal benefits for everyone and provide investors with the opportunities for trading diversified products Fourth, it is important to improve Vietnamese securities law as applied to more instruments for investors, especially short sell or clearing house Using strict punishment for insiders or those who over-stated the stock price illegally or produced dishonest information is important Fifth, increasing quality of listed companies, particularly correct information shown in pub-lic Announcing information late affects investors’ decisions and causes their loss since they could not reflect timely Finally, it is necessary to have more courses

relat-ed to securities and stock market at colleges or universities so that to teach students

to be potential individual investors and financial advisors

For securities corporations: first, they need to organize more training courses for

investors and financial advisors Securities corporations also should spend more time

on selecting and checking the listed companies’ legal activities profits or losses they announce public Besides, financial advisors need to balance the interests of securi-ties corporations and individual investors Professional ethics is the most crucial fea-ture of financial advisors Additionally, securities corporations support investors using

leverage However, some securities corporations have not enough capital for investors

to use this leverage or margin Finally, the overall number of securities corporations

in Vietnam needs to be reconsidered because many securities corporations have prob-lems with service quality, especially with untimely consulting or quality of consulting staff

For investors, our experts stated that one of the most important behavioral

bias-es invbias-estors notice were the loss aversion and regret bias since thbias-ese biasbias-es much affected investors’ decisions as well as intentions Moreover, it is necessary to improve investment knowledge and take part in training courses, specifically on securities investment It is also required to have analytical and assessment skills, predictable ability and a logical mindset Importantly, they should build trading forums, investing communities and consider carefully the companies that they make decision to invest into They should not merely depend on information that securities corporations announce Finally, investors think that Vietnamese stock market is a good playground

at which everyone exposes his/her mindset, critical thinking and the ability to survive and earn profit

Figure 1 Summary of solutions on attracting more individual

investors to the stock market, authors’

INDIVIDUAL

INVESTORS

- Avoid biases in investment decisions such as loss aversion and regret aversion

- Improve investment knowledge

- Attend training courses frequently

- Enhance analytical and assessment skills, predictable ability and logical mindset

- Build trading forums and investing communities to communicate and feel comfortable while investing.

SECURITIES

CORPORATIONS

- Offer training courses and provide knowledge to investors and financial advisors

- Be aware in selecting the listed companies

- Balance of interests between securities corporations and clients

- Expand instruments supporting investors such as using leverage

- Mobilize enough capital for investors to use leverage or margin

- Consult clients timely

- Reduce the total number of securities corporations to guarantee quality.

ATTRACT MORE INDIVIDUAL INVESTORS

TO THE STOCK MARKET

STATE

SECURITIES

COMMISSION

- Interact between HOSE and HAS and

provide information timely

- Increase the quantity of financial products

- Improve Vietnamese securities law

- Increase quality of listed companies

- Expand securities courses in universities and colleges

- Create a good playground comfortable for investors

Conclusion The study proposes solutions on attracting investors to Vietnam

stock market Many new findings were identified to help attracting the investors to this stock market as well as prevent loss aversion and regret aversion biases However, the study has some limitations due to small number of investors as well as financial advisors in Ho Chi Minh city and Ha Noi Capital Further research is suggested so that to interview more experts in other regions of Vietnam such as Mekong delta and

Da Nang city It is also important to have more similar quantitative researches to con-firm the effect of behavioral biases on investors’ decisions at stock markets

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