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

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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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Fisher and Statman (1997), quote that, the investors said

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stranger when they should buy stocks that are consistence with the investment objectives. for me, investing is playing

with stock markets it gives me a kick. This statement indicate that, apart from its value as a piece of anecdotic evidence on investor behavior, it also serves to illustrate that for many investors, investing constitutes more than simply weighting the risk and returns of various investment assets. Being aware of the many considerations and needs beyond risk and return that influence investors behavior, it is surprising that finance journals are mostly confined to the utilitarian benefits of low risk and high expected returns (Statman, 2004). According to Olsen (1998) and Wright (1984), most people consider themselves to be risk-avoiders rather than risk-takers. People will make decisions in which they are willing to accept a certain small return rather than a larger, but uncertain profit, from their financial decisions. The function of measuring risk tolerance is to differentiate people on the basis of the level of risk that they are willing to accept. That is, attitudes like risk tolerance are likely to change over time as people experience positive and negative outcomes of their previous investment decisions. Changes with age, family background, work lives, and changes in the performance of national and lobar markets will also determine investor s risk tolerance (Adams, Hayes & Hopson, 1976; Argyris, 1985). Hence, the investment environment in Malaysia has changed considerably overtime and opportunities for individual investors to become involved in investing have increased considerably, particularly with the encouragement from institutional.

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. In this paper, we have focused on the behavior of individual investors when buying various type of investment. In particular, we have conducted a behavioral finance analysis.

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2. Hypotheses Development 2.1 Theory of Behaviorism The theoretical model employed in this research is based on the theory of behaviorism. It is an extension of prospect theory or also known as risk aversion theory introduced by Khaneman and Tvensky (1979). This theory asserts that, when it comes to investing, people may not be as rational as they think. Behaviorists argue that

investors often behave irrationally when making investment decisions thereby incorrectly pricing securities. They relate investor s decision making behavior to gambler's fallacy, anchoring, mental accounting, overconfidence, overreaction (i.e emotion/intuition) and herding behavior (e.g Hey and Morone (2004), Banerjee (1992) and Bikhchandani, Hirshleifer and Welch (1992)). Therefore it is hypothesize that:

H1: Investment decision-making success of an investor is positively related to their emotion or intuition.

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. 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. Consequently, stock prices should accurately reflect fundamental values and will only move up and down when the unexpected positive or negative news, respectively. Thus, economists have concluded financial markets are stable and efficient, stock prices follow a random walk and the overall economy tends toward general equilibrium .

Therefore, it is hypothesized that:

H3: Investment decision-making success of an investor is positively related to their ability to analyze environmental factors

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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. Research Model

Based on the literature reviewed conducted for this research, it was found that study on investor s behavior was exhaustively done by many researchers (e.g Al-Hogail (2004), Olsen (1998), Pinello (2004), Barberis and Thaler (2002)). However, contradict opinion was found in terms of rational level of the investors. Many researchers categorized investors who make their decision based on information of the environment and fundamentals of the company as rational investor. Irrational investors are those who involve in herding behavior, speculation and rely their investment decision on frame of references. Below is the theoretical framework of this research:
Figure 1: Theoretical framework of Investors Behavioral Decision

4. Methodology 4.1 Sample and procedure

Data for this study was collected through structured questionnaires. The questionnaires were distributed via stratified random sampling to the investors traded their share in stock

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broking companies around Klang Valey, Malaysia. 4.2 Variables and measurement obtained from 200 questionnaires sent which comprise of 73.5 percent.

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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. The dependent variable, investors decision making was measured using five items. Responses were measured using five-point Likert type scale anchored by strongly disagree (1) to strongly agree (5). Meanwhile for the independent variable items with five-point Likert type scale was used to measure, with scale ranging from very unlikely (1) to very likely (5).
5. Analysis and Result 5.1 Demographic Profile

The respondents comprised mainly of male, which is 71.4%.

In terms of age, the

majority of the respondents are between the age of 30 to 39 years (49%) with , 21.1% having SPM, 15.6% Diploma/STPM level, 53.7% having Bachelor Degree, and 6.1% had their Master degree. 2.0% PhD and the rest (1.4%) of the respondents had other types of academic qualification. In terms of occupation, 16.3% of the respondents are working in government sectors, 29.3% in private sector and mostly are self-employment (54.4%).

Their income was around RM 4,000 to 6,000 per month (39 percent).
5.2 Investment Profile In the analysis of investment profile, the result shows that all investment vehicles chosen

by the respondents were moderate with an average mean of 3.5. The results indicate that, the respondent s choices of investment were diversified to various investment vehicles. However, among all, unit trust was found to have higher mean, followed by property, money market, bond and stock market. It s indicated that most investment made by the respondents were focused on long-term and low risk investment. Standard deviation values of 0.8 to 1.0 indicate that the variations of the data are in the acceptable range.
Table 1: Investment profile
Bond 3.95 .594 Stock 3.55 1.118 Property 4.34 .872 Unit trust 4.47 .805 Money market 3.97 1.020

Mean Std. Deviation

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6. Goodness of data

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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, factor analysis were conducted. Factor analysis is a data reduction technique. During factor analysis, factors with eigenvalue of more than one would be retained for further analysis (Hair et al., 2006). To reduce the problem of cross loading, if the differences of loadings of any item across factors were less than 0.50 than the items will be deleted (Snell and Dean, 1992). Next, reliability testing was applied to determine the degree to which measures are free from random errors. Reliability analysis was applied to identify how well the items grouped are positively correlated to one another. Cronbach s a value of 0.60 and above is considered to be reliable (Nunnally and Bernstein, 1994) as it indicates the items are homogenous and measuring the same construct. The result of the factor and reliability analysis is presented in Table 3 to 5. Factor analysis was conducted on items from investment behavior.
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. policy M'sia political situation Investment objective Company financial. Performan. 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 %

.942 .938 .931 .828 .793 .961 .956 .830 .763 .744 .949 .934 .666 .910 .898 .719 .629 .584 .806 2.888 57.75 57.75

.933 3.956 39.556 39.556

.994 2.138 21.381 60.398

.719 1.920 19.203 80.141

.954 2.216 73.874 73.874

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Table 3 presents the results of varimax factor rotation of all variables for independent variables. From the 18 items, five items loaded in factor 1, which form external/environmental analysis, with a variance of 39.5 percent, two items from financial analysis loaded on factor 2 with 31.28 percent and three items from economic analysis loaded on factor 3 with a variance of 19.2 percent. The total variance achieved is 80.14 percent. Furthermore, all the Cronbach s alpha values were between 0.72 to 0.99. All the above factors are measuring rational behavior of the investors in the present study. In measuring irrational behavior, table 3 shows that three items which form emotion or intuition behavior was loaded in factor 4 with a variance of 73.87 percent, five items from frame of references loaded on factor 5 with 57.75 percent Cronbach s alfa values for emotions or intuition behavior and frame of references were respectively.
6.1 Investment Decision Success

0.95 and 0.81

Investment decision success in the present study were measured based on the risk and return that the investors gain and tolerate. It also measured based on whether their investment objectives were achieved. In identifying investment decision of the investors, table 4 shows that five items was loaded unidimensionally with a variance of 76.81 percent. Cronbach s alfa values were 0.92. 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 .921 .910 .866 .849 .833 .924 3.841 76.815 76.815

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6. Descriptive Analysis 6.1 Behavioral analysis

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About the behavior of the investors, all of the respondents are moderate in terms of their risk level. We could categorize them as risk indifference as the mean are 3.05 for a range of 4. However in terms of their analysis behavior in making investment decision, it was found that they rely more on economic information (mean=3.8), followed by financial information of a company (mean=3.7), following others decision (3.2), looking at general environment (3.0) and finally relying on their own intuition and gut-feelings (2.95). From the findings, we could conclude that investors in the present study are

rational decision makers as they relying on the fundamentals before making their decision. However, in certain circumstances, they also rely on other s opinion, mainly their brokers, dealers, family and friends.
Table2: Decision profile
Variables Risk level Environment Financial Economy Emotion Frame of references Decision N=147 Mean 3.05 3.00 3.69 3.80 2.95 3.1850 Std. Deviation .868 .847 .942 .628 1.057 .76143

7. Inferential Analysis
7.1 Correlation analysis Test of relationship using Correlation analysis indicates the strength of bivariate relationships among the independent and dependent variable under study. This therefore indicates an early indication of possible interrelationships in multiple regressions. 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, in multiple regressions.

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Positive and significant correlations exist among all the independent variables and dependent variables except for environment and emotion. No pattern of relationship exists between environment analysis and economic analysis (r = -.021, p-value = .802), as well as environment analysis and emotion (r = -080, p-value = 0.335). Emotion and frame of references also shows insignificant and negative correlation (r = -.030, p-value = .719). This indicates that all the independent variable are not intercorrelated and independent of each other.

Table 5 Correlation analysis

Frame of referenc es

Mean

Std. Deviation

Decision making

Environ ment

Financial

Economy

Emotion

Decision making Environment Financial Economy Emotion Frame of references

3.05 3.00 3.69 3.80 2.95 3.1850

.868 .847 .942 .628 1.057 .76143

1.000 .061 .469** .743** .017 .669**

1.000 .072 -.021 -.080 .054

1.000 .390** .291** .603**

1.000 .143 .567**

1.000 -.030 1.000

** Correlation is significant at the 0.01 level (2-tailed)

The results of correlation analysis are tabulated in Table 4 above. The table indicates high

7.2 Regression Analysis

To evaluate the behaviors that influence investor s decision-making style, Multiple regression analysis was applied. Regression analysis was used to test the hypotheses. The result of the multiple regression models is reported in table 6 below. For the relationship between all variables, the correlation of coefficient (R) is 80.8%. Therefore, it shows that there is a strong positive relationship between the independent variables and dependent variables.

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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*** R square .652 Adjusted R square .640 R square change .652 F change 52.866*** .043 .095 .550*** -.077 .295*** Beta

***significant at the 0.01 level, ** significant at the 0.05 level, * significant at the 0.1 level

The multiple regression analysis model was significant ( p, 0.01) with F-value of 52.87. The coefficient of determination (R2) is 0.652, which indicate that 65.2 percent of the variations in investment decision-making style were explained by the independent variables (environment, financial and economic analyses as well as emotion and frame or references). Meanwhile the adjusted R2 value was 0.640. The multiple regression

analysis in this stage also indicates that the tested variables are significant at p, 0.01. The b-values (standardized coefficients) for each of the variables are as follows: Environment ( b=.043), Financial (b=0.95) economy (b=.550) Emotion (b=-.077) and Frame of References (b=.295) indicating that only economy and frame of references are positively related to investment decision making style. Therefore, 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. 8. 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). 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.

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Descriptive analysis results found that investors in the present study were rational investors, which rely very much on economic, financial, and external/environmental information in making their investment decision. However, for successful investment decision, both rational and irrational behaviors were needed. 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. 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. They need to analyze the economic information and at the same time follow expert opinion (eg. Stockbroker analysis, top ten stock performance, etc.) . Hence, previous study conducted by researchers like; Elsayed & Martin (1980), Katz (1998), Lamm-Tennant (1994), Meir Statman (1988) who said that successful investors were rational investors who analyze the information exhaustively was not in line with the current study.

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).
According to Hackett and Dominguez, investors do not make decisions in a vacuum. They may make better decisions by trying to understand the behavioral factors that can influence their judgment for example herd mentality (i.e. following the behavior of others). Herd Mentality on investment decisions has the potential to provide investors with many psychological benefits. Herding reduces the time needed to properly analyze an investment decision. It can also help reduce feelings of regret if the investment choice was a bad one. Investors can find comfort knowing that they were not alone in their decision. Herding can also be a powerful tool in influencing market movements. It is supported by the argument of Hoffmann and Jager (2003) who identified that, the needs, social interactions and (social) networks effect, are keys to understanding micro level investor behavior and macro level stock market dynamics.

In addition, the findings of the current study also found that Malaysian investors who relied and analyzed economic condition in making investment decision will lead to

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success. This findings is consistent with the assumption of Friedman (1988), that most

of the investors consider economic condition and price movement as the most significant contribution to their gain and losses in investing. effect only on the long run. This empirical study has several limitations. Firstly, the scope of investigation was done only at Kelang Valey. Therefore, in terms of external validity in generalizing the behavior for all Malaysian is still questionable. Secondly, the findings of this study depend largely on the respondent s honesty and integrity. However, if the respondent s answers were bias towards more socially desirable answers, the findings will also indicate biasness. 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.
9. Conclusion

Others, such as company s

performance, 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. From the findings it has been identified that economic condition and frame of references influence investors decision-making success. 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. As the current study found that investors are partially rational in making their investment decision, the insights provided by this study could be used by investors, 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.

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References

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Abhijit V. Banerjee, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, Vol. 107, No. 3, pp. 797-817 Al-Hogail, Abdulmalik Abdullah, Ph.D., The valuation effect of investor behavior on the relevance of financial information, Case Western Reserve University, 2004, 206 pages; AAT 3118119 Frieder, Laura L., Ph.D., 2004, An investigation of the trading patterns and heuristics of stockholders, University of California, Los Angeles, 155 pages; AAT 3133033 Kahneman, D. and A. Tversky, 1979, Prospect Theory: An Analysis of Decision under Risk, Econometrica, v47, 263-292. Katz, D. (1998). You didn t underperform, you overexpected. National Underwriter , 102, 12. Milton Friedman, 1988, Money and the Stock Market, Journal of Political Economy Vol. 96, No. 2, pp. 221-245 Nancy Ammon Jianakoplos and Alexandra Bernasek, 1998, Are women more risk averse?, Economic Inquiry 36, no4 620-30. Nicholas Barberis and Richard H. Thaler, 2002, A Survey of Behavioral Finance, Cambridge: National Bureau of Economic Research, NBER working paper series no. 9222. Olsen, R.A. (1998). Behavioral finance and its implications for stock-price volatility. Financial Analysts Journal, 54, 10-18. Pinello, Arianna Spina, Ph.D., 2004, Individual investor reaction to the earnings expectations path and its components, The Florida State University, 115 pages; AAT 3156246 Sushil Bikhchandani, David Hirshleifer, Ivo Welch. October 1992. "A Theory of Fads, Fashion, Custom, and Cultural Change as Informational Cascades." Journal of Political Economy, Vol. 100, No.5, pp. 992-1026. Young, M., & O Neill, B.M., 1992, Mind over money: The emotional aspects of

financial decisions. Journal of Financial Planning, 5, 32-36.

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