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[Podcast] The moderating role of deviation in investor behavior regarding the choice of securities investment consulting services: Empirical evidence in Vietnam

28 August, 2024

Keywords: Investment consulting services, behavioral bias, individual investors, stock investment, Vietnam stock market, COVID-19 pandemic.

The stock market in Viet nam has recorded a strong increase in the number of individual investors in the recent years. However, accompanying this positive trend is a worrying reality that this group of investors is easily influenced by crowd psychology and behavioral biases, leading to wrong investment decisions, causing losses and effects on the stable development of the market. In that context, stock investment consulting services are proven to help individual investors make more reasonable and effective investment decisions.

Urgent need towards investment efficiency improvement for individual investors in the Vietnamese stock market

In Vietnam, along with the transition towards a market economy and integration with the world economy, the financial services market has been formed and gradually developed with diverse types of products as follows: banking services, insurance services, financial market services, financial consulting services. However, financial investment consulting services in general and stock investment in particular have not really received the adequate attention on both supply and demand sides although the Vietnamese stock market has, so far, had an acceptable reputation. After 25 years of establishment and development, the capitalization has increased nearly 6,000 times higher (capitalization value in 2000 was 986 billion VND and that of December 25, 2023 was 5,863 trillion VND), attracting millions of domestic and foreign investors.

Individual investors are an important force in the stock market, contributing to improving market liquidity. While traditional financial theory holds that individuals are fully informed when participating in the market and in particular, they often make decisions based on the principle of maximizing their benefits. However, the researches in behavioral finance have demonstrated that individual investors do not always behave rationally. Their investment decisions are heavily influenced by emotions and behavioral biases. Furthermore, other numerous studies have found that behavioral biases have a significant influence on the investment decisions of individual investors.

The service regarding securities investment consulting has been affirming their essential role in supporting individual investors towards improving their knowledge and skills for more informed and effective investment decisions. Recognizing the importance of this type of service, securities companies have been making efforts to provide a variety of consulting solutions suitable to the needs of each customer. Therefore, in the current context of unpredictable market fluctuations, the role of stock investment consulting services becomes more important than ever.

Originating from the urgent need to improve investment efficiency for individual investors in the Vietnamese stock market, the research topic titled “The moderating role of deviation in investor behavior regarding the choice of securities investment consulting services: Empirical evidence in Vietnam was proposed by the author group from University of Economics Ho Chi Minh City (UEH).

Factors affecting the decision to use stock investment consulting services

The research method used is a combination of qualitative and quantitative. Qualitative methods are used to synthesize information from the previous research, expert interview is to identify behavioral bias, and a corresponding questionnaire is designed. The quantitative method uses scales that have been developed and adjusted to suit the Vietnamese context. This research uses binary probit and ordered probit regression methods so as to estimate behavioral biases that have a significant impact on the choice and the level of use of stock investment advisory services by individual investors.

Research results indicate that behavioral biases listed as overconfidence, self-attribution bias (including self-aggrandizement and self-protection), emotional calculation, hindsight bias, and the reverse position, all of which affect the decision to use securities investment consulting services.

Self-protection bias (component of self-attribution bias) has the strongest and leaves most positive impact on both the selection decision and the degree of reliance on the recommendations of securities consultants. Individual investors in Vietnam tend to underestimate their own failures and blame their financial advisors. The fact thatr the advisors will be blamed for negative performance suggests that individual investors tend to avoid taking responsibility for failures and to blame others.

The reverse position effect and overconfidence are also among the behavioral biases that affect individual investors’ decisions to choose consulting services. These investors often overestimate their own knowledge and financial capacity; therefore, they limit their trust in investment consultants to entrust their portfolio. Meanwhile, overconfidence can lead to overtrading, poor diversification and taking on too much risk.

The research results also conclude that personal characteristics listed as financial knowledge, age and income affect the behavior of using securities investment consulting services. The more frequently investors trade, the higher the level of entrusting decisions to the consultant become. Compared to women, men are less dependent on consultants when investing in the market.

Proposed solutions towards the investors

From the research results, the author group has proposed solutions as follows:

*Implementing tools and measures to help investors identify behavioral biases

To increase consulting efficiency, investment consultants need to have tools, techniques or combined measures in the investment consulting process aiming at minimizing and, especially, helping investors limit the negative impacts of behavioral bias and avoid biased behaviors that affect the decision-making process of individual investors. One of the best methods is to provide investors with a combination of training, knowledge and tools – also known as “decision maker modification”. The foundation of this approach is based on the classic controversial research on the benefits of education as well as thinking strategies, rules of thumb, and more formal decision support tools that people can be taught for effective use. For example, people often delay saving for retirement, partly because of the mistaken belief that investments grow linearly over time. To combat the erroneous thinking of those who believe in linear growth investing, people can be taught the compound interest or simple approximations like the “rule of 72” (if X is the annual interest rate, money doubles after approximately 72/X years).

The second method is “modifying the investors decision-making environment”, that is, to find ways to change the environment for investors in the investment decision-making process when receiving advice in a direction corresponding to the environment that we humans make our decisions without assistance.

Two current but totally different ways to modify the environment are to be listed as follows:

  • One common approach is to change something concerning the situation that motivates investors to process information more appropriately. Similar savings packages are offered by companies to employees in the form of graphs showing wealth growth over time or under different annual contribution scenarios.
  • The second approach is to adapt the environment to human biases. For example, the “Save More Tomorrow” program is very effective because it helps encourage employees to increase savings for future retirement plans while salaries do not increase. Therefore, it can be stated that it is the environmental change without restricting choices or significantly changing motivation that changes our human behavior.

*Incorporating a variety of strategies and measures to overcome behavioral biases

Each bias has different solutions to help overcome the negative impact of that bias on investors. However, below are recommendations that can help limit behavioral biases, focusing on overconfidence and the self-attribution effect of investors. For example, encourage investors to consider the perspectives of others, from family members and friends to their investment plans. The reality demonstrates that we often tend to be more objective when considering other people’ decisions, instead of our own.

Another method that can be used is that the investment advisors discuss with their clients their past investment decisions and how they made those decisions. Demonstrate that, if possible, how overconfidence has led to poor results over time and compare these results with the results the investor could have achieved with a more realistic approach. Finally, consider asking investors to perform what is known as an “autopsy”. This process, used quite commonly by the Nobel economics prize-winning psychologists Amos Tversky and Daniel Kahneman, involves imagining potential outcomes from a future perspective – perhaps 5, 10 or 20 years later. Start by imagining that the investment strategy the client is considering has been successful, and from this imagined point in the future, think of all the reasons why that investment strategy has worked well. Then, imagine that this strategy is similar but less effective and think through all the reasons for its failure. This exercise can help clients predict the potential risks and the mistakes that they may have overlooked due to their overconfidence. Using a combination of these measures can potentially help protect clients from making poor investment decisions. In short, that, in turn, can build deeper trust and strengthen relationships between investment advisors and their clients.

*Implementing educational programs and training courses at consulting units to improve the level of financial knowledge for stock investorsSeeking professional financial advice is one of the ways to help investors manage risks and improve investment efficiency. Through the consulting process, investors gain more investment knowledge and effective financial management. However, financial literacy does not only refer to knowledge but also implies skills in effective financial management including activities related to budgeting, saving, investing and general decision-making concerning an individual’s goals towards personal finances.

A number of financial literacy program initiatives are being implemented around the world with the goal of helping individuals have certain knowledge and understanding in the financial decision-making process and invest more safely with various forms listed as online courses, workshops and educational seminars on personal financial management and investments. An example is “Cha-Ching Financial Literacy,” a program developed by Cartoon Network that uses animated videos and games to teach children awareness regarding personal finance and investing. Another example is Sand Dollar Financial Literacy, a program developed by the Central Bank of Barbados that offers online courses and educational resources on investment awareness and personal finance. Or the 360 ​​Financial Literacy program created by the American Institute of Certified Public Accountants offers online courses and educational resources on investment awareness and personal finance.

In Vietnam, very few personal financial management programs are being widely implemented and sponsored by the government. The research results present that a high level of financial knowledge helps investors realize the benefits of financial advice, resulting in the changes in their decision-making behavior to use the service. Therefore, Vietnamese securities companies, first of all, need to deploy educational programs and training courses to help investors improve their understanding and to know how to use investment and risk management tools more effectively. This helps not only improve the financial knowledge level of individual investors but also promote the company’s image in demonstrating responsibility to the community and the society.

In addition, managers should take additional steps to establish a securities investment consulting profession that prioritizes protecting customer interests and limiting conflicts of interest between parties. For example, setting regulations on the consultant’s obligations during the consulting process, including prioritizing the client’s interests and prohibiting conflicts of interest. Setting new educational standards for current and future consultants. Setting the ethical rules that financial professionals must adhere to.

Please refer to the full research titled “The moderating role of deviation in investor behavior regarding the choice of securities investment consulting services:  Empirical evidence in Vietnamon UEH website.

Author group: PhD. Phan Chung Thuy, Associate Professor, PhD. Nguyen Thi My Linh, MSc. Nguyen Thi Ngoc Loan, Ngo Minh Hieu – Ho Chi Minh City University of Economics.

This is an article in a series of articles spreading research and applied knowledge from UEH with the message “Research Contribution For All – Research For The Community”, UEH respectfully invites dear readers to look forward to the upcoming newsletter UEH Research Insights.

News and photos: Author group, UEH Department of Marketing and Communications