NATIONAL ECONOMICS UNIVERSITY

CARDIFF METROPOLITAN UNIVERSITY

ACCOUNTING AND AUDITING

BEHAVIOURAL FINANCE AND ITS EFFECTS

Subject majors: Ba Accounting & Finance

Supervisor: Doan Thuy Duong
Students: Duong Linh Nga
Students ID: CMU20207
Module Title: Contemporary Finance
Module code: BAC6030
Class: BIFA 7C

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 Contents

INTRODUCTION...................................................................................................3

1.Assume the client's investment portfolio............................................................3

2. The information technology industry and hypothetical companies...................4

DISCUSSION AND RECOMENDATION...........................................................5

1. Heuristics and related bias..................................................................................5

2. Psychological human..........................................................................................6

3. Evaluate and recommendations..........................................................................8

CONCLUSION......................................................................................................10

REFERENCE........................................................................................................11

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 INTRODUCTION

In Vietnam, the information technology stock market is growing strongly and attracting domestic
and foreign investors. Therefore, technology stocks have become the most potential and
interesting stock group. However, price fluctuations are still unpredictable through different
periods. Additionally, understanding of the behavioral factors that influence investment decisions
is very limited. Suppose in the future I am a financial analyst and my client wants to invest in the
information technology stock market. As her financial advisor, I will provide a list of good
stocks and guidance on how behavioral finance concepts can impact her investment decisions in
the market . Behavioral factors are psychological factors including emotions and cognition that
play an important role in the decision-making process of investors (Waweru, 2008). These
theories posit that rational investors will maximize their profits by following basic financial
rules. However, the level of risk tolerance of investors depends on their personal characteristics
and attitude towards risk (Maditinos, 2017). As a result, this essay will investigate how
behavioural aspects influence individual investors' decision-making in the current stock market.
Because knowledge of the potential impact of such factors helps managers make informed
decisions in times of high stock price volatility.
1.Assume the client's investment portfolio
The first assumption concerns the customer's financial status. Assume she is young, about thirty
years old, and is working as a teacher. Estimate her current income, remove monthly expenses,
and build aside enough reserves to cover family's expenses for the next 3-6 months. She had a
reasonable sum of savings after estimates, about 50 million. Because she wanted to earn more
income faster and more than depositing it in the bank, she would do something with the savings
just mentioned above. Finally, she decided to try investing a little sum of money in a few random
stocks on the stock market. Although there were a few losses, the losses were minimal because
the capital was little. But she was largely fortunate to make a profit. This makes her ambitious to
invest more to gain more profit. However, the fact that she made a profit is due to luck and she is
not an expert in this field. Therefore, she wants to learn more about this field and wants to invest
a large amount of money and earn higher profits than before. Therefore, she did some research
and found out that she had an uncle who worked in the information technology industry. Her
uncle told her that this was a growing industry, and he pushed her to invest in the company

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where he worked. After listening to her uncle and consulting more about media information, she
started paying attention and focusing on equities in the information technology business.
2. The information technology industry and hypothetical companies
According to assessment from BSC Securities Company, the information technology group on
the stock exchange will have positive business results in the second half of 2023 thanks to factors
such as software export growth in Japan and Asia. In addition, this industry group is expected to
benefit from the digital transformation trend that continues to take place in Vietnam as well as
the world (Hieu, 2023). Furthermore, it is easy to see that in in the current digital age, with the
advancement of artificial intelligence, cloud computing, and numerous other technological
disciplines, the technology business has limitless development opportunities. Thus, it can be seen
that the characteristics of technology stocks are quite optimistic and attracted her and she
expressed her desire to invest in the stock codes FPT and CMG. In particular, Technology Group
Joint Stock Company (CMG) is where her uncle is working and he helped her buy shares at a
more favorable price on the market. FPT and CMG belong to the TOP two large companies, FPT
Group (FPT) and CMC Technology Group Joint Stock Company (CMG), respectively. These are
all significant, respectable enterprises in the information technology industry that have been in
operation for more than ten years and are listed on HOSE (a stock exchange market that only
listings companies having a charter capital of more than 120 million VND). Both firms began
trading shares more than a ten years ago and have since fared quite well and have a solid
earnings potential. Up to now, FPT and CMG have outstanding shares of over 1 billion and 100
million shares, respectively (Vietstock , 2023). The number of outstanding shares of a
corporation is defined as the number of shares that have been issued and are being traded on the
stock market. As can be observed, these are two "hot" stocks in the information technology stock
market, attracting investors.

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 DISCUSSION AND RECOMENDATION

It is critical for a financial analyst to examine the impact of behavioural finance ideas on
investment decisions of customer, particularly when investing in technology stocks. Regarding
the definition of behavioral finance, according to Fama, it is a branch of finance that uses
psychological biases to explain anomalies in the stock market (Fama, 1998). Furthermore, it
emphasises the use of psychological and economic elements to improve financial decision
making (Olsen, 1998). Thus, behavioural finance is the study of the influence of psychology on
the behaviour of financial market players. The essay will then explore her reasons for being
interested in these stocks by relating them to concepts in behavioral finance. Relevant
recommendations are then derived.
1. Heuristics and related bias
First of all, she is interested in these stocks because these are both domestic enterprises with a
high recognition in the market. Although priorities are gradually changing, it is still true that
domestic investors mainly hold their own country's securities. Sociological research shows that
in the same country in different regions, investment practices are also different, they often invest
in companies where they live or companies they know well about. For example, American
investors will hold the majority of American equities, while Vietnamese investors will hold the
majority of Vietnamese stocks. According to general knowledge, the two firms she picked have a
lengthy history of operation in Vietnam and a solid reputation in the sector. This is a
manifestation of familiarity heuristics. It is the tendency to seek familiarity and comfort. People
enjoy things that are familiar to them. Vietnamese investors are better familiar with their home
country's stock market, thus they feel safer and more secure investing in their home country.
Language and institutional hurdles, as well as disparities in transaction levels and interest rates,
are some of the reasons why investors are hesitant to participate in foreign markets,
notwithstanding their attractiveness. Furthermore, if investors opt to engage in the domestic
market, they may have (or feel they have) an informational edge. The advantage of being near to
the corporation appears to be enhanced monitoring and access to private information.
Furthermore, the special reason why she chose CMG is because this is the company her uncle is
working for. This provides assurance because she can promptly inquire about the company's

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financial position through that uncle, and she will also have easy access to project details or
valuable stocks from within. However, if individuals become accustomed to this familiarity, they
will have a propensity to disregard new things (which can have positive outcomes) in favour of
returning to the familiar. Even if they realise it's no longer good, strive to "endure" with the
available, familiar things. To avoid this from happening, investors should access new
information and take the time to learn deeply about it and make the right financial decisions. As
for FPT stock, the reason she paid attention and chose it was because of its popularity and perfect
financial information. Most investors believe that the better the company, the better the
investment choice. They will avoid investing in young, new, growing companies because they do
not fit the spiritual archetype of a good company. For example, FPT Group is very famous in the
industry and has net revenue of over 25 billion in the period 2019-2022, meaning 4 consecutive
years (Vietstock, 2023). Net revenue is defined as the amount of money a company obtains from
conducting business, selling products and services, after taxes and deductions are subtracted. Or
a gross profit of more than 5 billion VND, constantly growing from 2015 to 2022, implying 8
years in a row. Based on this information, investors will assume that future business results will
continue to increase and may even increase higher than now. This is a manifestation of
representativeness heuristics. This expression is simply described as the tendency not to pay
much attention to long-term factors, but often pay more attention to typical short-term situations
in the past. For example, FPT's net revenue in the period 2019-2022 increased steadily and
peaked in 2022 at 44 billion, the largest number ever in the company's financial history. But if
you look at the whole long period of 2015-2022, you will see that FPT's net revenue sometimes
goes up and down, not constantly increasing (Vietstock, 2023). This can be a trap that makes it
difficult for investors to evaluate information because it is likely that high income growth will
not be repeated.
2. Psychological human
Based on several types of emotions, explain why investors prefer the two equities mentioned
above. Because her past profitable luck makes her feel confident in her judgments and vision,
she chooses stocks that she feels are good. Upbeat events in the past make her inclined to
exaggerate her own talents. From there she concluded for herself that her decision and vision
would always be right. This is a manifestation of overconfidence emotion. Overconfidence is a
psychological state in which people overestimate their knowledge and talents or are unduly

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optimistic about their ability to handle the situation, believing that they know more than other
investors (Financial magazine, 2020). However, overconfidence does not imply that a person is
ignorant or incompetent, but rather that their perception of themselves is superior to reality.
Under-diversification is a common mistake made by investors due to overconfidence.
Underdiversifiers are quick to over/underweight stocks when they perceive a positive/negative
signal and the result is inadequate diversification. Most tiny and young investors do not have the
time to analyse a huge number of stock, so they will quit up after finding a few that they believe
are looking good. After selecting these few stocks, they will ask themselves, "Why choose more
and dilute the portfolio with stocks I haven't researched?". Related to low diversification is
excessive risk taking. A trader who is overconfident and too loyal to his or her initial beliefs may
ignore negative information, causing the stock price to fall. As a result, they will hold on to
losses for longer periods of time and take on more risk. Another reason she was drawn to these
two firms was their "beautiful" profit picture and very steady dividend payment statistics.
Although her losses in stock investments were very minimal and she was typically fortunate to
recover profits, the psychological loss was still difficult to compensate for. For example, For
example, an investment loss of about 5 million VND causes great sadness that even the joy of
earning 5 million VND later cannot make up for it. It is apparent that, from the perspective of
human psychology, with the same amount (for example 5 million VND) the pain due to loss is
greater than the joy generated from additional profit. Usually they have to gain more (5 million
VND) to make up for the loss (for example, you have to gain 20 million VND to compensate for
the pain of losing 5 million VND previously). This is a manifestation of the loss-aversion
emotion. Loss aversion can be understood as a cognitive bias, describing why, for individuals,
the psychological pain of loss is twice as strong as the pleasure of gain (Son, 2022). Normally,
many investors do not want to admit any losses. Therefore, to avoid experiencing the pain of a
“real” loss, they will continue to delay selling stocks when small losses appear and execute the
sell order as soon as the investment brings a small profit. The negative impact of this is that
investors often continue to hold on to losing investments much longer than they should and end
up incurring much larger losses than necessary. That is the trap that loss aversion causes in
practice. To overcome and resolve the fear of loss, investors need to consider what the worst
outcome will be and prepare information and psychology to accept those risks. If faced with a

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situation that is certain to be risky, investors should approach the problem in a way that tries to
reduce losses instead of trying to make a profit.

3. Evaluate and recommendations

The preceding section discusses how heuristics and emotions influence investor psychology and
decisions. It is clear that they have an impact on investors both favourably and negatively. She
needs to get rid of overconfidence when investing, because it completely adversely affected her
financial results. Since it causes investors to overestimate their knowledge. Overconfidence
might boost trading frequency since it makes the investor entirely confident in his or her opinion.
Furthermore, investors will always see their decisions as less dangerous than those of other
investors. To avoid something bad from happening, investors should dig deep into their
investments and diversify their portfolios. Next, she is affected by the representativeness
heuristics. She tends to evaluate the likelihood of future events, based on similarities with certain
typical situations encountered in the past. This, invisibly, causes investors to predict the market
according to existing patterns, but forget the internal factors of the business that have changed.
Investors need to review and learn about companies' financial parameters and information, which
are publicly posted on electronic securities newspapers. Furthermore, investors should monitor
the news and read more publications to stay up to date on the latest stock market news.
Additionally, seeking familiarity and safety is good, but investors should differentiate
information so as not to miss out on new things that will bring more profits. Finally, to overcome
loss aversion, investors should set reasonable expectations of profit (15 - 20%/year) to reduce
their own risk. With a profit target of 50-100%/year... that means they will have to choose riskier
stocks and hold them during periods of hotter growth. Therefore, that stock will be more volatile,
the losses you may encounter will be larger, and will ultimately make your psychology more
unstable. No one can maintain a profit level of 50 - 100%/year from stocks continuously for
many years in a row. In fact, a profit of 15 - 20%/year is already a desirable profit level.
Lowering your profit expectations will help you choose financially quality stocks that are more
stable, safer, less volatile and help your psychology become more stable.
Regarding the two stocks she chose, despite being caught up in some trends and bad psychology
when making her decision, these two stocks are still worth investing in. She should, however,

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diversify her portfolio with different stocks. She should invest in a variety of other stocks using
her current funds. Because she has saved money for her family and herself for 3 to 6 months,
losing her capital will not have a significant impact on her life. As a result, she might think about
entering the overseas investment sector. Because the worldwide stock market is influenced by a
variety of factors and the economies of numerous countries, it varies dramatically, providing
investors with the possibility to benefit significantly.

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 CONCLUSION

To be successful, investors must not only understand finance, economics, and stocks, but they
must also understand and regulate their emotions when investing. Therefore, psychological
factors play a very important role in every investor's decision. Regarding the factors that
influence behavioral finance on investment decisions and investment efficiency, the essay
proposes 5 factors: overconfidence effect, representativeness effect, herd effect, effect "anchor"
and the loss aversion effect. The essay then investigates investor market behaviour using
theoretical frameworks from the field of behavioural finance.

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REFERENCE

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