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JULY 2009

INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS Investment decision making style: Are Malaysian investors rational decision makers?
Dr. Nik Maheran Nik Muhammad

VOL 1, N O 3

Listed in ULRICH S

Faculty of Business Management, Universiti Teknologi MARA, Kelantan, Malaysia Mazurainy Abdullah Faculty of Business Management, Universiti Teknologi MARA, Kelantan, Malaysia

Abstract The Malaysian capital market offers an array of investment products in a form of shares, loan stocks, bonds, warrants, and unit trusts. The type of products chosen by an investor to commit his capital depends largely on his financial goals, time frame, and amount of capital available. Different people invest with different strategies or even no-strategies. However, previous studies found that most individual investors who play the stock market often ask for hot tips that will enrich them overnight. Too often investors buy stocks on a whim or on the recommendation of a stranger when they should buy stocks that are showing fundamental strength and consistence with their investment objectives. Therefore, the main objective of this research is to study the factors that influence investors investment decision making and their risk tolerant. The population for the study consists of individual investor who trade share on Bursa Malaysia. 147 questionnaires were distributed and usable. The results of regression analysis indicate

high positive and significant relationships among the independent and dependent variable except for emotion factor. Key words: Investment decision-making, risk tolerant, equity market 1. Introduction Most ordinary people who play the stock market often ask for hot tips that will enrich them overnight. Too often investors buy stocks on a whim or on the recommendation of a

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apart from its value as a piece of anecdotic evidence on investor behavior. That is. it also serves to illustrate that for many investors. attitudes like risk tolerance are likely to change over time as people experience positive and negative outcomes of their previous investment decisions. particularly with the encouragement from institutional. but uncertain profit. 2004). According to Olsen (1998) and Wright (1984). the investors said VOL 1. work lives. from their financial decisions. The overall purpose of this research project is to gain knowledge about key factors that influence investment decision style focusing on whether the investors are rational of irrational in making their decisions. This statement indicate that. N O 3 stranger when they should buy stocks that are consistence with the investment objectives. Hayes & Hopson. Argyris. investing constitutes more than simply weighting the risk and returns of various investment assets. we have focused on the behavior of individual investors when buying various type of investment. the investment environment in Malaysia has changed considerably overtime and opportunities for individual investors to become involved in investing have increased considerably. it is surprising that finance journals are mostly confined to the utilitarian benefits of low risk and high expected returns (Statman. COPY RIGHT © 2009 Institute of Interdisciplinary Business Research 97 . for me.JULY 2009 INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS Fisher and Statman (1997). Hence. 1976. The function of measuring risk tolerance is to differentiate people on the basis of the level of risk that they are willing to accept. In particular. quote that. People will make decisions in which they are willing to accept a certain small return rather than a larger. we have conducted a behavioral finance analysis. most people consider themselves to be risk-avoiders rather than risk-takers. Changes with age. 1985). investing is playing with stock markets it gives me a kick. Being aware of the many considerations and needs beyond risk and return that influence investors behavior. family background. and changes in the performance of national and lobar markets will also determine investor s risk tolerance (Adams. In this paper.

Hypotheses Development 2. it is hypothesized that: H3: Investment decision-making success of an investor is positively related to their ability to analyze environmental factors COPY RIGHT © 2009 Institute of Interdisciplinary Business Research 98 . H2: Investment decision-making success of an investor is positively related to their frame of references of and investors (herding behavior) However. many economists argue that investors behave rationally when buying stocks. stock prices follow a random walk and the overall economy tends toward general equilibrium . Therefore it is hypothesize that: H1: Investment decision-making success of an investor is positively related to their emotion or intuition. respectively. overconfidence. It is an extension of prospect theory or also known as risk aversion theory introduced by Khaneman and Tvensky (1979). Hirshleifer and Welch (1992)). They relate investor s decision making behavior to gambler's fallacy. mental accounting. stock prices should accurately reflect fundamental values and will only move up and down when the unexpected positive or negative news. Consequently. Behaviorists argue that investors often behave irrationally when making investment decisions thereby incorrectly pricing securities. Thus. overreaction (i. when it comes to investing. This theory asserts that.e emotion/intuition) and herding behavior (e. anchoring. They are presumed to use all available information to form rational expectation about the future in determining the value of companies and the general health of the economy.1 Theory of Behaviorism The theoretical model employed in this research is based on the theory of behaviorism.JULY 2009 INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS VOL 1. Banerjee (1992) and Bikhchandani. N O 3 2.g Hey and Morone (2004). people may not be as rational as they think. Therefore. economists have concluded financial markets are stable and efficient.

Below is the theoretical framework of this research: Figure 1: Theoretical framework of Investors Behavioral Decision 4. Olsen (1998). Research Model Based on the literature reviewed conducted for this research. Irrational investors are those who involve in herding behavior. Barberis and Thaler (2002)).g Al-Hogail (2004). contradict opinion was found in terms of rational level of the investors.1 Sample and procedure Data for this study was collected through structured questionnaires. Methodology 4. speculation and rely their investment decision on frame of references. However. Pinello (2004). it was found that study on investor s behavior was exhaustively done by many researchers (e.JULY 2009 INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS VOL 1. N O 3 H4: : Investment decision making success of an investor is positively related to their ability to analyze economic factors H5: : Investment decision making success of an investor is positively related to their ability to analyze financial factors 3. Many researchers categorized investors who make their decision based on information of the environment and fundamentals of the company as rational investor. The questionnaires were distributed via stratified random sampling to the investors traded their share in stock COPY RIGHT © 2009 Institute of Interdisciplinary Business Research 99 .

55 1. the respondent s choices of investment were diversified to various investment vehicles.4%.805 Money market 3. 21. among all. VOL 1.5 percent. 2.5. with scale ranging from very unlikely (1) to very likely (5).3% in private sector and mostly are self-employment (54. bond and stock market.1% had their Master degree.0% PhD and the rest (1.6% Diploma/STPM level.47 . The results indicate that. 4.97 1.1 Demographic Profile The respondents comprised mainly of male. followed by property. The dependent variable.118 Property 4.4%) of the respondents had other types of academic qualification.JULY 2009 INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS broking companies around Klang Valey.000 per month (39 percent). It s indicated that most investment made by the respondents were focused on long-term and low risk investment. 29. the majority of the respondents are between the age of 30 to 39 years (49%) with .8 to 1. 5.95 .3% of the respondents are working in government sectors. money market.872 Unit trust 4. Table 1: Investment profile Bond 3.34 . Malaysia. However.0 indicate that the variations of the data are in the acceptable range. 5. Analysis and Result 5. investors decision making was measured using five items. Standard deviation values of 0. which is 71. and 6. Deviation COPY RIGHT © 2009 Institute of Interdisciplinary Business Research 100 . 15. 16.1% having SPM.4%).020 Mean Std. Responses were measured using five-point Likert type scale anchored by strongly disagree (1) to strongly agree (5). In terms of occupation.2 Investment Profile In the analysis of investment profile. Meanwhile for the independent variable items with five-point Likert type scale was used to measure. N O 3 A total of 147 responses were The instruments were adapted from various literatures and were modified for the adaptation to the investor s behavior context. In terms of age. the result shows that all investment vehicles chosen by the respondents were moderate with an average mean of 3.7% having Bachelor Degree.594 Stock 3.2 Variables and measurement obtained from 200 questionnaires sent which comprise of 73. 53. unit trust was found to have higher mean.000 to 6. Their income was around RM 4.

reliability testing was applied to determine the degree to which measures are free from random errors.888 57.994 2. Table 3:Factor analysis and reliability test result Factor Loading F1 Environm ental analysis F2 Financial Analysis F3 Economic Analysis F4 Emotion/ Intuition F5 Frame of Reference s Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q10 Q11 Q12 Q13 Q14 Q15 Q16 Q17 Q18 Analysis on Nikkei Analysis on Hang Seng Analysis on Dow Jones Understand M'sian invest.629 .398 .954 2. factors with eigenvalue of more than one would be retained for further analysis (Hair et al. Cronbach s a value of 0.75 .931 . if the differences of loadings of any item across factors were less than 0. factor analysis were conducted.920 19. Performan.. Factor analysis is a data reduction technique. Reliability analysis was applied to identify how well the items grouped are positively correlated to one another.910 .203 80. Goodness of data VOL 1.744 . 1994) as it indicates the items are homogenous and measuring the same construct. 1992). Next. During factor analysis.JULY 2009 INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS 6.763 .828 .719 1.830 .60 and above is considered to be reliable (Nunnally and Bernstein. 2006).141 .938 . policy M'sia political situation Investment objective Company financial.933 3.138 21.949 .806 2.50 than the items will be deleted (Snell and Dean.216 73.874 COPY RIGHT © 2009 Institute of Interdisciplinary Business Research 101 .666 .584 .381 60.942 .956 . Study current market price Study historical market price Study world economy Speculation behavior Self confidence Rely on gut-feeling/emotion Television Fund advertisement Magazines Stock brokers analysis Top ten stock Reliability Cronbach Alpha Eigenvalues Percentage of Common variance Cummulative % .556 .793 . The result of the factor and reliability analysis is presented in Table 3 to 5.556 39.75 57. N O 3 In identifying whether all the items operationalized in the present study are tapping into the same construct and measure what it is suppose to measure. To reduce the problem of cross loading.874 73. Factor analysis was conducted on items from investment behavior.719 .934 .898 .961 .956 39.

95 and 0.14 percent.87 percent. In measuring irrational behavior. two items from financial analysis loaded on factor 2 with 31.JULY 2009 INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS VOL 1. All the above factors are measuring rational behavior of the investors in the present study. From the 18 items.92. Cronbach s alfa values were 0. with a variance of 39.849 . Furthermore.841 76.81 percent.833 . The total variance achieved is 80.921 .2 percent. which form external/environmental analysis. It also measured based on whether their investment objectives were achieved.924 3.815 COPY RIGHT © 2009 Institute of Interdisciplinary Business Research 102 . In identifying investment decision of the investors.5 percent. N O 3 Table 3 presents the results of varimax factor rotation of all variables for independent variables.910 .1 Investment Decision Success 0.28 percent and three items from economic analysis loaded on factor 3 with a variance of 19.815 76. five items loaded in factor 1.81 Investment decision success in the present study were measured based on the risk and return that the investors gain and tolerate. five items from frame of references loaded on factor 5 with 57. 6.99. table 4 shows that five items was loaded unidimensionally with a variance of 76.866 .75 percent Cronbach s alfa values for emotions or intuition behavior and frame of references were respectively. all the Cronbach s alpha values were between 0. Table 4: Factor analysis and reliability test result on Investor s decision Investor s decision success Q1: investment expected return Q2: Investment holding period Q3: Investment objectives Q4: Investor s risk tolerance Q5: Investors reaction towards loses Cronbach Alpha for nature of decision Eigenvalues %age of Common variance Cumulative % Factor 1 . table 3 shows that three items which form emotion or intuition behavior was loaded in factor 4 with a variance of 73.72 to 0.

dealers.868 .7). Inferential Analysis 7.JULY 2009 INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS 6. N O 3 About the behavior of the investors.847 . However in terms of their analysis behavior in making investment decision.95).69 3. Table2: Decision profile Variables Risk level Environment Financial Economy Emotion Frame of references Decision N=147 Mean 3.00 3. We could categorize them as risk indifference as the mean are 3.2).80 2. all of the respondents are moderate in terms of their risk level.95 3. Deviation .76143 7. followed by financial information of a company (mean=3. it was found that they rely more on economic information (mean=3. in multiple regressions. family and friends. they also rely on other s opinion. This therefore indicates an early indication of possible interrelationships in multiple regressions.05 for a range of 4.057 .8). mainly their brokers.628 1. we could conclude that investors in the present study are rational decision makers as they relying on the fundamentals before making their decision. From the findings. in certain circumstances.1850 Std.1 Correlation analysis Test of relationship using Correlation analysis indicates the strength of bivariate relationships among the independent and dependent variable under study.0) and finally relying on their own intuition and gut-feelings (2. However. The correlations between the independent variables also can be used to identify reasons for insignificance of one independent over another when explaining the variations in the dependent. following others decision (3.05 3. looking at general environment (3.942 .1 Behavioral analysis VOL 1. Descriptive Analysis 6. COPY RIGHT © 2009 Institute of Interdisciplinary Business Research 103 .

01 level (2-tailed) The results of correlation analysis are tabulated in Table 4 above.469** . Table 5 Correlation analysis Frame of referenc es Mean Std. the correlation of coefficient (R) is 80.1850 .847 . The table indicates high 7.030.335).JULY 2009 INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS VOL 1.021.2 Regression Analysis To evaluate the behaviors that influence investor s decision-making style.000 .05 3. Deviation Decision making Environ ment Financial Economy Emotion Decision making Environment Financial Economy Emotion Frame of references 3.000 .802). The result of the multiple regression models is reported in table 6 below. No pattern of relationship exists between environment analysis and economic analysis (r = -.057 .291** .080 .000 ** Correlation is significant at the 0. COPY RIGHT © 2009 Institute of Interdisciplinary Business Research 104 . p-value = .669** 1.061 . p-value = 0.95 3.017 .000 . This indicates that all the independent variable are not intercorrelated and independent of each other.868 .567** 1.942 . Regression analysis was used to test the hypotheses.80 2. Emotion and frame of references also shows insignificant and negative correlation (r = -.69 3.00 3.743** . Multiple regression analysis was applied. For the relationship between all variables.000 -.719).628 1. N O 3 Positive and significant correlations exist among all the independent variables and dependent variables except for environment and emotion. it shows that there is a strong positive relationship between the independent variables and dependent variables.143 .603** 1.8%. Therefore. as well as environment analysis and emotion (r = -080.390** .76143 1.030 1. p-value = .072 -.054 1.021 -.000 .

652 Adjusted R square . Rational or irrational behavior were measured based on whether they analyze their investment before deciding to invest or relying on their emotions and frame of references respectively.05 level.652 F change 52. Financial (b=0. Therefore.077) and Frame of References (b=.640. COPY RIGHT © 2009 Institute of Interdisciplinary Business Research 105 . 8. The multiple regression analysis in this stage also indicates that the tested variables are significant at p.295*** Beta ***significant at the 0. The coefficient of determination (R2) is 0.550*** -.077 . ** significant at the 0. * significant at the 0.JULY 2009 INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS VOL 1. it is concluded that only H3 (rational behavior in terms of analyzing the economy is positively related to investment decision making style) and H5 (frame of references is positively related to investment decision making style) were supported.652.01.2 percent of the variations in investment decision-making style were explained by the independent variables (environment. The b-values (standardized coefficients) for each of the variables are as follows: Environment ( b=. 0.95) economy (b=.1 level The multiple regression analysis model was significant ( p. Discussion This study intends to investigate the relationship between investment decision-making success of the investors and their behavior of investing (either rational or irrational). Meanwhile the adjusted R2 value was 0.87. N O 3 Table 6 Model summary and standardize Beta Coefficient of multiple regression analysis F value Model Summary Environment Financial Economy Emotion Frame of references 52.866*** . 0. financial and economic analyses as well as emotion and frame or references).01) with F-value of 52. which indicate that 65.043 .550) Emotion (b=-.043).01 level.640 R square change .295) indicating that only economy and frame of references are positively related to investment decision making style.866*** R square .095 .

According to Hackett and Dominguez. financial. Meir Statman (1988) who said that successful investors were rational investors who analyze the information exhaustively was not in line with the current study. They need to analyze the economic information and at the same time follow expert opinion (eg. Herding reduces the time needed to properly analyze an investment decision. Investors can find comfort knowing that they were not alone in their decision. The result of the present study conform that there were positive and significant relationship between economic analysis and frame of references to investment decision success. Katz (1998). However. Hence. previous study conducted by researchers like. They may make better decisions by trying to understand the behavioral factors that can influence their judgment for example herd mentality (i. for successful investment decision. the findings of the current study also found that Malaysian investors who relied and analyzed economic condition in making investment decision will lead to COPY RIGHT © 2009 Institute of Interdisciplinary Business Research 106 . which rely very much on economic. However. the finding of the current study on the investor s partial-rational in making their investment was consistent with the study done by Hackett and Dominguez (1994). Herd Mentality on investment decisions has the potential to provide investors with many psychological benefits. social interactions and (social) networks effect. In addition. Elsayed & Martin (1980). and external/environmental information in making their investment decision. etc. top ten stock performance. This indicates that the investors who are neither relying on their emotions or intuition in making their investment nor exhaustively analyzes their investment before making their decision won t significantly lead into investment decision success. are keys to understanding micro level investor behavior and macro level stock market dynamics. the needs.JULY 2009 INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS VOL 1.) . investors do not make decisions in a vacuum. following the behavior of others). Stockbroker analysis. N O 3 Descriptive analysis results found that investors in the present study were rational investors. Herding can also be a powerful tool in influencing market movements. It can also help reduce feelings of regret if the investment choice was a bad one. Lamm-Tennant (1994).e. both rational and irrational behaviors were needed. It is supported by the argument of Hoffmann and Jager (2003) who identified that.

It is known that individuals would agree more on socially desirable answers and disagree more towards socially undesirable answers rather than fully and truly express their feelings and the opinions. N O 3 success. such as company s performance. the findings of this study depend largely on the respondent s honesty and integrity. the insights provided by this study could be used by investors. political condition and government policy is considering giving major The main objective of this study is to identify the factors that are involved in influencing investment decision-making success. 9. Results from this study has shed some light on which constructs in the behaviorism model can be better used to answer the real behavior of Malaysian decision maker when making investment decision of either rational or irrational. Conclusion Others. COPY RIGHT © 2009 Institute of Interdisciplinary Business Research 107 . in terms of external validity in generalizing the behavior for all Malaysian is still questionable. organization and the government as a foundation to formulate strategies to control and monitor the economic condition and at the same time having more professionals advisor in advising small investors in making their investment decision. As the current study found that investors are partially rational in making their investment decision. From the findings it has been identified that economic condition and frame of references influence investors decision-making success. if the respondent s answers were bias towards more socially desirable answers. the scope of investigation was done only at Kelang Valey. Firstly. This empirical study has several limitations.JULY 2009 INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS VOL 1. However. effect only on the long run. Secondly. that most of the investors consider economic condition and price movement as the most significant contribution to their gain and losses in investing. the findings will also indicate biasness. This findings is consistent with the assumption of Friedman (1988). Therefore.

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