The Importance of Investor Behavior Finance Essay

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Investor behavior is one of the subjects that have been analyze aggressively through theoretical studies and empirical studies; which delivers different results from both point of view. Investor behavior study can be analysis made on demographics and psychographics of investors considering their age, gender, income group and other facts that influence investor decision making on some particulars investment. This investigation is to study the motive behind investment and other objectives for choosing certain investment. Also, by comparison, it is analytical in nature and investigate through external laws of nature, which is to study what “cause” traders to judge their perception of current market conditions before they themselves have do the right decision to change their point of view. An unknown investor once famously quote the biggest obstacle and worst enemy for our investment success is the one standing in front of your mirror. The ‘human nature’ description that we often call and describe our own for everything we do all the time is a dangerous maladaptive behavior when allowed to roam wild in the world of share market. Stepping into the world of stock market and investment, as an investor are you well equipped with capital, skills. Well, even you have superb raw brain power for calculating and analysis, but are you emotionally stable or rational enough to make investing decision. For many years of reports and analysis, academics and practitioners have been doing serious study of how individual investor’s state of mind has to do with investment decision making. It has been proven that many investors always been emotionally affect and could not handle their investing behavior steady enough to make an impact on their investment performance.

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Background of the study

Year 2011 has been a solid and shining performance year for Malaysia economy as Malaysia hoping for the same improving results in year 2012. With the foreign direct investment pretty well delivered, inflation issues been handled with care, the financial sector industry of Malaysia has been pretty much steady as result. Still, European debt crisis that strikes the Europe fatally has pretty much affect the whole world as well. With the exact figure of economy growth yet to be exposed, it is expected that in year 2011 economy has improvement of 5.3 percent and expecting to hit 5.6 percent by 2016. Not to forget that according to Department of Statistics (DOS), Malaysia GDP balance of payments has been outstanding comparing 2010 with an 18 percent of improvement, which US$20.2 billion in 2011 and US$23.8 billion in 2012. Yet, vulnerability of local market has been causing uncertainty and confusion for investors to predict as it market condition is difficult to be ascertain with financial tools and measurement. With investor rational attitude has been witnessed through the analysis, its proven investors that fully maximize utility and shows flawless self-control are inadequate through the years. Based on Psychological Biases and Investor Behaviour: Survey Evidence from Malaysian Stock Market by Audrey Lim Li Chin, it states that Malaysian investor behavior problem most common with overconfidence of themselves; which refuse to take further analysis and refuse to listen to expert opinions. Second most common behavior is the regret effect, which investor behavior change whenever they made high purchase and low sell on stock, holding one stock too long. With these negative experience cause them regret on their behavior, in the end it affect their further decision making. “The random ripping of confidence is one factor that recessions are so difficult to forecast. They may not just be changes in degree from a period of economic expansion but different processes endangered by fear. Out economic models never have been particularly successful in capturing a process driven in large part by non-rational behavior.” quoted by the US Federal Reserve Chairman Alan Greenspan opinion about global weakening economy market. By understanding investment behavior which involves human behavior and psychological mechanism of decision making., financial model is easy to understand and determine current investment market reality and situation. For this research to study on investor behaviour, the best concept to use in this proposal is by using psychological behaviour. In the book of The Four Pillars of Investment by William Bernstein, it states that studying on investor psychological behaviour is like studying on human social interests and beliefs, exactly like why men wore short hair in 1950s and long hair in 1970s. Exactly during the period of 1970s to 1990s when company like Microsoft, Apple and Disney business starts booming in the share market, investor psychological social thinking and egoism make them eager to own part of the shares of those company. In this research, I’m going to demonstrate how human psychological would react with share market surprises and how would investor psychological obscuring the thinking of investors to make right decision when the facing risk and opportunity at the same time.

Problem Statement

The important of understanding investor behavior is the fact that deep negative emotions such as jealousy and anger can results to self-destructive and A unnecessarily patterns of behavior such as passion to crime and road rage (Loewenstein, 1996), according to a group of studies using a gambling task, researchers have shown that individuals with emotional poor management often perform poorly comparing investors who have disciplined emotional self-control A (Bechara et al., 1997; Damasio, 1994; Rogers et al., 1999) Recent evidence suggests that even relatively mild negative emotions that do not result in a loss of self-control can play a counterproductive role among normal individuals in certain cases. One of the problem statements that investors do not know what the types of investor behaviors exist in them are and certainly they are not sure what kind of negative results could bring if they are not aware of their investor behavior. On the other perspective, internal management of an IPO company is responsible to understand their customer behavior and psychological thinking in order to inprove stock marketability

Study objectives

Main aims of this research are to examine important personal and environmental factors that will affect investor behavior and analyze how it will influence decision-making process too;

Scope of this study

The scope of this study will be focus more in Kuala Lumpur of Malaysia, which where the stock market taking place for more than thirty years since its inception. Research and questionnaire will be study on IPO companies that been listed in the website of Bursa Malaysia. The limitation of this research is that based on the time and capability, this research will only study and analyze in Malaysia, which is not related to other country and certainly cannot represents share market of other country.

Significance of study

The significance of study will contribute a comprehensive analysis and better understanding of types of behavior that would bring impact and importance of handling it. A complete understanding of investor behavior would bring impact to Malaysia investors to perform well and prevent the common behavior mistakes.

Justification of the study

The intent of this research initiative is to examine the independent variable factors influencing on decision making of investors, variables include demographic, price volatility and wealth maximization; providing a comprehensive study on correction between importance investor behavior and decision making.

Methodology

Questionnaire will be used in this research base on quantitative research. Primary and secondary data collection method will be executed in this study. Primary data collection would be no other than questionnaire and secondary data collection will through online data (journals, article etc) and textbooks. My target group for investor behaviour would be local investment firm full time worker or part time worker, practical finance student that will represent for most investors in Malaysia. My questionnaire will be distributed in area of Kuala Lumpur. Sample size of 100 distributions with 60 expected respondents to be representing my research.

Conclusion

This research is to do a comprehensive study on most kind of common behavior that appear mostly in investors, determining the relationship between the investor behavior and investment outcome. Also, I would discuss the demographic variables such as age, gender and income, the roles of it and how it would affect the behavior as well. With these skill mastered by investor it would benefit investor, the financial market, also the IPO companies. https://www.theborneopost.com/2011/12/25/malaysia-year-in-review-2011/ https://iamee.edu.in/pgdm/publications/IAMEE%20Investor%20Behavior%20Analysis.pdf https://web.ku.edu/~finpko/myssi/FIN938/Grinblatt%20%26%20Keloharju_insto%20vs%20indiv_JFE_2000.pdf https://www.nber.org/chapters/c1235.pdf https://www.meta-formula.com/support-files/article_johnssonm_behaviouralfinance90s.pdf Questionnaire https://www.scribd.com/doc/30778181/Questionnaire-An-Analysis-on-Investor-Behaviour-on-Various-Investment-Avenues-in-India https://www.brandsberg.com/user/1011471/1/11204260930690.php

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The Importance Of Investor Behavior Finance Essay. (2017, Jun 26). Retrieved August 12, 2022 , from
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