UEH UNIVERSITY

SCHOOL OF BUSINESS
FACULTY OF FINANCE

BEHAVIORAL FINANCE

Ho Chi Minh City, April 8th, 2022

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 UEH UNIVERSITY
SCHOOL OF BUSINESS
FACULTY OF FINANCE

MID TERM ESSAY

Subject: Behavioral Finance

Lecture: Ms. Le Thi Phuong Vy

Student’s Name: Ta Thi Minh Chau
Batch – Class: K45 – FNC01
Student’s ID: 31191020277

Ho Chi Minh City, April 8th, 2022

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Table of Contents
Part I: Identifying investor behavior bias observed in Vietnamese stock market..........................3
Part II: Recent studies on overconfidence and its effect on investors’ decisions..........................5
References.................................................................................................................................................7

Part I: Identifying investor behavior bias

observed in Vietnamese stock market
Vietnamese stock market has been considered as weak- to semi strong -form of efficient
market. As being in these aforementioned types of efficient market, the stock market
itself as well as its players including investors.

Thanks for detailed and insightful works of Thaler (1980); Knetsch and Sinden (1984);
Kahneman and Tversky (1984); Samuelson and Zeekhauser (1988); Barberis, Shleifer, and
Vishny (1998); Edwards (1968); Kahneman, Knetsch, and Thaler (1991), and so on,
alongside with observing from Vietnamese stock market, the writer has realized that
there are some notable behavioural biases which influence and rule the way they
[investors] react.

The first one is the behaviour bias created by the overconfidence state. This occurrs
when the investor has a belief that the stock market is continually growing in the near
future. We have witnessed this belief in the stock market through the number of new
trading accounts , which can be called F0 account by some brokers and stock market
analysts, has been opened in 2006 and in the period of 2020 to 2021. According to the
State Bank of Vietnam (SBV) the number of accounts in 2005 is roughly around 31,000,
however in 2006 this figure witnesses the tripple gain and increases to around 100,000
accounts. The increase in the number of trading accounts in 2006 has reflected the
overconfidence state of the investors at that time. They [investors] believe that the stock
market will continually develop in the future and overconfidence about the probability
of gaining higher returns regardless the chosen companies have small size in operation.
Also, in the period of 2020 to 2021, the writer also witnesses the same trend as of 2006.
According to Vietnam State Deposit (or VSD in short), from March 2020 to June 2020,
there were roughly 100,000 new accounts, of which the new accounts in March 2020
were 31,949 accounts and in April 2020 were about 36,721 accounts. In the
accumulating basis of the last four months, the Vietnamese investors have opened

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137,753 accounts equivalent 73 percent of 2019’s newly-opened accounts lifting up the
number of trading accounts to 2.54 million. In addition, the number of individual newly-
opened accounts in December 2021 was around 226,390 marked this figure as the
highest-level of the stock market. These aforementioned figures have proved that the
investors believed that they can create higher returns even though the economic
outlook would be predicted as gloomy in the future after the midst of Covid-19
pandemic.

Figure 1.1: The number of Individual accounts opened through the period of 2017 to
2021 (VnEconomy, 2022)

Next, the Herding psychological effect have also appeared and dominated in the stock
market. This is because our market is not a strong efficient market. This means that all
information can affect the performance of stock market indices, the price of the
companies’ share. Specially, the price of the companies’ share might not reflect and
respond to the revealed information. Therefore, the reaction of investors might not be
alongside with the change of the price of the stock market’s share and arisingly
appeared information. The writer can see this trend recently. Especially, when Tan Hoang
Minh, real-estate corporation win the tender for roughly 10,000 square metres in Thu
Thiem with the price above the normally-traded price level, particularly U.S.$ 1.1 billion
equivalent VND 2.45 billion per square metre, 8.3 higher than the normal price, more
and more investors pour their capital in some infrastructure development and property

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companies, for example, CII (or CII Engineering and Construction JSC (CII E&C) in full).
We can see the price of CII Share have increased from VND 28,000 per share to VND
46,400 per share, equivalent 65.71% increase

Finally, some of stock market investors are loss aversion persons. This means that
some investors are afraid of risks that cause the decline in their income. A notable
example, when there are news about the CEO of FLC Corporation has been put in prison
for manipulating the price of share, the investors who have pour money on this
company’s share try to sell all the shares they have hold to cut loss which can make the
price of this share take a nose dive. Even those [investors] who do not hold FLC’s share,
but hold the share of other companies operating in the same fields and industries also
do the same action.

Part II: Recent studies on overconfidence and

its effect on investors’ decisions
As in the first part, we have mentioned that overconfidence is one of the biases that can
determine the behaviours’ decisions, now, in this part, the writer will examine some
recent works focusing on nature of overconfidence, methods and limitations to know

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how we judge about overconfidence, the development of the doctrine of
overconfidence and the application in reality.

First of all, Priya Kansal and Seema Singh (2018) has identified the determinants of
overconfidence bias in the India stock market. In this work, the authors [Priya Kansal and
Seema Singh (2018)] has conducted an exploratory research to find which demographic
factors can change the behaviors and decisions of the investors in the background of
specific overconfidence level and the impact of each of overconfidence bias’
constituents, for example, “better than average” effect, “planning fallacy”, “self –
attribute”, and “positive illusion”. This work reveals the positive occurance of
overconfidence bias in those investors who are more experienced and successful in the
India Stock Market, and proves that there is no sign of demographics factor including
gender, age and general education can not affect the level of overconfidence. Although
the work has shown its useful findings on the overconfidence and demographic factor
of investors and their experiences, this work also face some hindrances caused by its
limitation, particularly, the investors in India Stock market have a different set of
demographic factors in comparison with those in other country’s stock market, for
example Parkistan, or Vietnam, and so on. Obviously, when other users of this work
adopt the findings in other country’s stock market, the results might be different.
However, we can not deny the fact, this work has its unique because of the attempt of
the authors to quantify the level of overconfidence among individual investors. In
addition, the attempts to find the relationships between demographics factors and
overconfidence might have contributed a valuable discovery and supplumentary to
existing literature.

Next, Masaya Ishikawa and Hidetomo Takahashi (2010), has provided a new look on the
relationship between overconfidence managers and external financing choice or in other
words the decision on corporate finance by tracing records of earning forecasts in
Japanese listed firm. They found the result that managers who do not have
overconfidence bias can assist the company gain better performance in the future
through the earnings forecast. Besides analysing the effect of overconfidence bias on
financial decisions, they also examine some other factors including assymetric
information, risk and tax motivation, market conditions, economic significant,
robustness. Although the authors did not mention their works’ limitations, the writer
finds that their work can also apply in Japan stock market where the investors have
different set of demographic factors if we compare with other markets, including the
market in our home country, therefore, this work can only be applied for just Japan
stock market.

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Third, Markus Glaser and Martin Weber (2007) tried to examine the theoretical model
about overconfident investors and their trading volume, which can be the unique point
of their research. This model assumes that overconfident investors might trade more
than other types investor. To test this model, they collected data from 3000 online
broker investors, and measured the trading volume of 215 out 3000 surveyed investors
who did answer the questionnaire. They also treated overconfidence as judgement bias
in financial models. Furthermore, they used cross –sectional regressions for one of
overconfidence’s consituents and realized only variable named miscalibration influent
the investors in deciding the volume of trade and that result has damaged the
theoretical models which we have mentioned above.

Finally, Julija Michailova and Ulrich Schmidst (2016) want to pave the way for assessing
the relationship between overconfidence and the probability to create bubbles in
experimental assets market by experimentally create a model to measure an
overconfidence bias via Bias score (BS). They regulate that when the bias score has
negative, the investors have no overconfidence bias. Otherwise, they [the surveyed
investors] have overconfidence bias. This is the uniqueness of this work. Through this
model, they found that the low overconfidence markets (the markets consist of low
overconfidence investors have been outrun in the number of trading activities, and have
low volatility, risk aversion, and so on).

References
Ishikawa, M., &Takahashi, H. (2010). Overconfidence Managers and External
Financing Choice. Review of Behavioral Finance. n/a(2), 37-58, Retrieved
01/04/2022, doi: 10.1002/rbf.8

Glaser, M., & Weber, M. (2007). Overconfidence and trading volume. The Geneva Risk
and Insurance Review, 32(1), 1-36, Retrieved 01/04/2022 at:
http://www.jstor.org/stable/41953463

Kansal, P., & Singh, S. (2018). Determinants of Overconfidence bias in Indian stock
market. Qualitative Research in Financial Markets. Retrieved 01/04/2022 at:
http://doi.org/10.1108/QRFM-03-2017-0015

Michailova, J., & Schmidt, U. (2016). Overconfidence and Bubbles In Experimental

Asset Markets. Journal of Behavioral Finance, 17(3), 280 -292. Retrieved
01/04/2022, doi: 10.1080/15427560.2016.120325