Literature review:
This chapter will entail a review of the current relevant literature to elucidate the findings of other researchers on matters related to individual investor behavior in the stock market. In essence, empirical studies investigating the behaviors of investors will be explored, although there is limited information on the factors that influence these behaviors among individuals. Furthermore, two major behavioral finance theories will be explored further in this literature review, including the Mental Accounting Theory and the Prospect Theory. It is important to note at this point that due to the limited amount of literature on the factors influencing individual investor behavior in stock markets, this review of literature will review previous studies involving individual, professional and corporate investor behaviors.
2.1 Behavioral Theory
Behaviorism is a learning theory that only focuses on objectively observable behaviors and discounts any independent activities of the mind. Behavior theorists define learning as nothing more than the acquisition of new behavior based on environmental conditions.
Mirfeiz F.Shams, H.Kordlouie and H.k Dezfuli, Islamic Azad University Iran 2012, "Behavioral finance" is a subordination of "behavioral economics". Behavioral economics combines the twin disciplines of psychology and economics to explain why and how people make seemingly irrational or illogical decisions when they spend, invest, save and borrow money . According to behavioral finance, we want to recognize and explain the ways that how sensation effects and misunderstanding can affect investors and their decision process … etc
2.2 Prospect Theory
Markku Kaustia, Helsinki School of Economics 2005, Prospect theory, in a form typically used in the finance literature, is unlikely to explain the disposition effect. First, the empirical propensity to sell a stock is increasing or approximately constant as the gain increases, whereas a reasonable parameterization of a prospect theory value function predicts that the propensity to sell will decline as the gain increases. Second, the empirical propensity to sell is approximately constant in the domain of losses, while prospect theory again predicts it will decline as the loss increases. Prospect theory combined with exogenous liquidity shocks does predict that more gains are realized than losses. But even in that case, prospect theory predicts that the propensity to sell declines as the stock price moves away from the purchase price in either direction, a prediction that is clearly rejected by the data.
2.3 Mental Accounting Theory
Mirfeiz F.Shams, H.Kordlouie and H.k Dezfuli, Islamic Azad University Iran 2012, Mental accounting exceeds the confining assumptions of the traditional paradigms so to develop models of financing in compliance with the realities. The limited power of calculation, the complexity of decision-making problems and systematic errors of judgment are all the causes of the irrational behavior of humans. Behavioral finance theory believes that people apply mental accounting at the time of financial decision. In other words, people tend to make different financial decisions in separate mental accounts, undermining the most rational way of making all decisions under a unifying decision portfolio.
2.4 The behavior of stock market investors in the United Arab Emirates (UAE) and the Kingdom of Saudi Arabia (KSA).
– Hussein Al-Tamimi (2005) found that there were six main factors that influenced investor behavior in the UAE, including the anticipated earnings of potential investment companies, marketability of a stock, government shareholdings in companies, past performance of a company’s stock, the creation of the organized financial market and the influence of get rich quick schemes.
The information, obtained from the Abu Dhabi Securities Markets and Dubai Financial Market, also pointed at five factors that had the least impact in influencing people to invest in stock markets, including tendency to minimize risks due to anticipated losses in other local stocks, expected losses in global financial and securities markets, gut feeling on a deteriorating economy and negative family member opinions regarding stock investments. According to Hussen &Al-Tamimi, the most influential factors, religious reasons, and opinions of relatives were observed to have the least influence on investor behavior in the Emirates.
– Hussein Al-Tamimi and Kalli (2009), the financial literacy of individual investors in the UAE and the factors that shaped their investment decisions suggested that the financial literacy of the subjects was way far from the required average level. The study indicated that the investors knew more about the diversification of stock investments but had minimal or no understanding of the important financial markets indices of the UAE. The author attributed the low financial literacy levels to low levels of income and financial education.
Intriguingly, Al-Tamimi and Kalli (2009) found that there was a notable disparity between the level of financial literacy between the male and female gender, with the women having a lower level of financial acuity compared to the men. The leading influential factors for this population included religious reasons, firm reputation, perceived investment and monetary ethics of the firm, and diversification reasons. The four least influential factors were relatives ‘opinions, recommendations from friends and colleagues, rumors and ease of accessing investment loans. Indeed, low financial literacy was found to be statistically significant in poor or lack of investment in stock markets. The findings of these studies, despite being slightly different in identifying the factors.
– Hossain & Nasrin (2012) they assert that all possible factors that influence investor behavior and decisions cannot be constant all the time and may vary significantly from investor to investor depending on demographic, personal and socioeconomic factors.
2.5 Studies conducted outside the GCC.
– Karachi Stock Market in a study investigating the market to identify the factors influencing the behavior of investors, Azam and Kumar (2011) concluded that the earnings per share, the growth of gross domestic product and foreign direct investment in Pakistan were the main factors influencing the behavior of corporate and individual investors in equities. Along the same lines, Kaleem, Wajid, and Hussain (2009) studied individual behavior and found that the main factors influencing investor decisions in the Karachi financial market were age, income, level of education and the main language they used. In a further review of the effect of demographic factors on investor decisions in Karachi, Geetha and Ramesh (2012) reported that demographic factors are important in determining the specific investment decision, but are insignificant in making other elements of the investment process.
-Jordan’s Amman Stocks Exchange, in a research investigating the trading of Stocks Exchange, Fares and Khamis (2011) used the multiple regression technique to identify four factors influencing the behavior of investors, which were age, education level, Internet availability and productivity of investor-broker interactions. These authors reported that there was a significant positive correlation between the age, education level, Internet access, and investor-broker interaction.
– Sri Lanka Stock Market, Cooray (2003) identified the amount of risk involved, potential return on investment, taxation implications, liquidity of stock investment, terms of investment and expected rate of inflation as the major factors that influenced the investment behavior and decisions of individuals interested
– Bangladesh ( Dhaka Stock Exchange & Chittagong Stock Exchange), Hussain and Nasrin (2012) reported findings of eight most significant factors influencing the recruitment and retention of investors. These principal factors were specific company attributes and reputation, accounting information, gross and net asset value of the company, company’s publicity, trading opportunities, ownership and governance structure, personal finance needs and the influence of other people including relatives and friends.
– The Nigerian Stock Exchange (NSE), Aregbeyen and Mbadiugha’s (2011) findings in their study where they found that the ten most critical factors influencing investor behaviors in Nigeria included motivation by financially successful people who are experienced in stocks trading, future monetary needs and security, influence by the management team of a corporation, recommendations by reputable professional stock brokers, awareness of shares investment prospects, trust in the board of directors managing a firm, financial performance history of the company, a firm’s ownership structure, and trustworthy predictions of future growth in share value and bonus awards.
In another study done in Nigeria, Obamuyi (2013) found that Nigerians' investment decisions were influenced by a company's stock value, expected capital increases and bonus awards, expected corporate growth and earnings and dividend sharing policy. Get-rich-quick schemes were also reported to have a great influence in influencing the respondents to invest in the stock market. Also, he found that secondary factors influencing individual investment decisions in the study population included age, gender, education level and marital status.
-Greek ( Athens Stock Exchange. ASE), Merikas et. Al. (2003) Adopted a modified questionnaire to analyze factors influencing the investor behavior, The results indicate that individuals base their stock purchase decisions on economic criteria combined with diverse other variables. They do not rely on a single integrated approach, but rather on many categories of factors. The results also revealed that there is a certain degree of correlation between the factors that behavioral finance theory and-and previous empirical evidence identify as the influencing factors for the average equity investor, and the individual behavior of active investors in ASE influencing the overall trends prevailing at the time of the survey in the ASE.