Zamri Ahmad

Psychoanalysis of Investor Irrationality and Dynamism in Stock Market

This article provides an alternative theoretical framework to explain investors’ irrational behaviours in finance theories (mainly asset pricing) based on psychoanalysis approach. This is an approach used by psychoanalysts and psychiatrists to investigate human minds. The investigation is facilitated by interdisciplinary theories, namely (a) bounded rationality theory which differentiates intuition and reasoning, (b) prospect theory which explains framing and valuation and (c) theory of mind which divides behavioural risks into cognitive heuristics and affective biases. These theories collectively explain the origin of irrational behaviours. Additionally, (d) the ABC (Activating–Beliefs–Consequences) model is also used to interpret the causes and effects of irrational behaviours on investors and market behaviour. Last theory, (e) the dual system model of preference is used to conceptualize the bounded human mind that contains both rational and irrational elements. The proposed theoretical framework provides the theoretical foundation of investors’ irrational origin, forces, causes as well as their systematic effects on investors, asset prices and stock market behaviours dynamism. The validity of the theoretical framework is supported by empirical test using a representative of emerging stock market data and behavioural risk proxies.

Behavior of fund managers in Malaysian investment management industry

Purpose - This paper aims to explore the relevance of bounded rationality to the practice of institutional investors in Malaysia. Understanding institutional investor behavior is important, as it can determine the asset prices and consequently the market behavior. Design/methodology/approach - A set of questionnaires is used to solicit information regarding the understanding and practical application of behavioral finance theories and strategies among fund managers in the Malaysian investment management practice. In the process, bounded rational theory is aimed to be validated. Fund managers’ possible bounded rational behavior is assessed with reference to their investment management approaches and strategies right from individual beliefs and acquisition of information, as well as investment management and strategies used. Findings - The findings lend support to the notion that institutional investors too, being normal human beings, are expected to think and behave in a boundedly rational manner as postulated in bounded rational theory. The sources of bounded rationality are individual, institutional and social forces. Thus, portfolio trading and investment management strategies are exposed to wide varieties of behavioral risks. Despite the notions that behavioral risks are real and the impact on fund performance could be pervasive, fund managers’ self-awareness regarding control and institutional readiness to govern behavioral risks in investment practices is still low. Research limitations/implications - Empirical evidence drawn in the current paper is subjected to small sample size and specific focus on Malaysian context. Despite this limitation, the sample is statistically sufficient and provides a fair representation, as well as quality opinions, of fund manager’s investment management behavior in Malaysia. This research provides valuable implications to practitioners (fund managers) and regulators (investment management and capital market policymakers). In practice, the current study draws some practical ideas, especially for buy-side institutional investors, on the source and impact of behavioral biases on fund management practices and performance. For regulators, this research highlighted the needs and possible ways to regulate these behavioral risks. Originality/value - The current paper provides new insights on the theory and practice of the institutional investor. In theory, this research provides evidence of bounded rationality of institutional investor behavior, practicing in the asset management industry in the emerging markets of Malaysia. This evidence lends support to the validity of the bounded rationality theory in explaining institutional investor behavior. In practice, thisresearch provides new insights on the relevance of behavioral finance perspectives and strategies in the asset management industry practice and policy.

Institutional investor behavioral biases: syntheses of theory and evidence

Purpose - This paper aims to review the theory and empirical evidence of institutional investor behavioral biases in the lenses of behavioral finance paradigm. It surveys the research specifically focusing on behavioral biases among institutional investors in investment management activities worldwide. Design/methodology/approach - A literature survey is done to gather and synthesize evidence on behavioral biases of institutional investors. Findings - The survey and analysis reveal the following findings. First, the theoretical underpinning of investors’ irrational behavior has been neglected in behavioral finance research. Second, the behavioral heuristics and biases are dynamic and complex. Third, understanding behavioral biases’ origin, causes and effects requires interdisciplinary perspectives from the fields of psychology, sociology and biology. Originality/value - The analysis and alternative perspectives drawn in this paper provide new insights into the field of behavioral finance and aims to suggest researchers, practitioners and regulators on the next course of actions.

Psychological Biases Abilities on Constructing Weekend Anomaly

Even though many researchers have proposed trading behavior as the explanation of the Monday Irrationality or Day-of-the Week anomaly, yet, it has still left without empirical evidence. This research aims to investigate empirically by gauging psychological approach whereas the affection bias (weather-induced mood, and moon-induced mood), and cognition bias (attention bias, and cognitive dissonance) are the factors. Our results report that investor’s Monday irrationality is caused by those psychological biases. Employing one traditional dummy interaction model and an innovation model with market index returns and size-based portfolio returns as our constructs, we found the psychological biases are the explanations beyond the DOWA over the period of 1 January 1999 until 22 March 2010. This research found size does matter in this case as the intuitive judgment of investor plays role on investment decision. Our findings support the conclusion that psychology of investor does play important role on investment decision and resulting DOWA.

Effects of political crises on cointegration between ASEAN-5 stock markets and the US stock market

This study examines the level of cointegration of ASEAN-5 stock markets and the developed stock market of the USA. It also seeks to find out the effects of crises with a political nature on this cointegration. Five stock indices – SES, KLCI, STE, PSE and JSX – and the stock index of the NYSE were selected to represent the ASEAN-5 stock markets and the US stock market, respectively. Two political crises, namely September 11, 2001 and the 2003 US invasion of Iraq, were selected as the crises benchmarks of the study. Data cover a nearly ten-year period, after the Asian financial crisis to the end of 2007. In order to examine the effects of crises on stock markets, each series was divided into two periods of precrisis and postcrisis. The findings reveal that all ASEAN-5 stock markets, except Singapore, which is considered the most efficient stock market among the five, are highly sensitive to political crises which happen in the USA. The results also suggest that, in recent years, all ASEAN-5 stock markets have tended to be more efficient in their relationships with the US stock market.