It was not until much later that contradictive evidence started to pile up and behavioral finance emerged in response. This chapter confronts the main foundations of the neoclassical theory of finance with allegations of the behavioral approach. Theoretical models of classical financial economics do not take into account the possibility of decision maker irrationality.
It is often assumed that irrational investors are not coordinated and therefore their behavior cancels out. And even if irrationality becomes strong and common among a large group of investors, it will be voided by rational actions of arbitrageurs.
However, behavioral finance points out limits to arbitrage. It is argued that irrationality of investors may indeed influence asset pricing.
Behavioral Finance: Investors, Corporations, and Markets
The behavioral approach is of high importance also for the second side of capital market, that is issuers. A discussion on key elements of corporate finance policy in the light of behavioral implications concludes the first chapter. In its quest to explain the phenomena taking place in the capital market, behavioral finance has drawn a lot on psychological findings applying selected insights of this branch of science to the study of investor behavior.
The great majority of these insights do not provide theoretical background as such. Rather, they concern certain phenomena previously described by psychology which were later transposed onto economics and finance. Only then were they used to construct models of investor behavior and develop a new school of thought in the theory of finance.
This chapter discusses the different attitudes investors adopt when making decisions about buying securities and managing investments in the capital market. The discussion that follows usually focuses on individual players, but may sometimes also be relevant for professional investors. This chapter systematizes and thoroughly discusses a number of phenomena observed on the capital market that the classical theory of finance considers abnormal. This chapter focuses on the consequences of behavioral biases to the capital market as a whole. Two major anomalies in the aggregate market-wide data, that is, the equity premium puzzle and the excessive volatility puzzle, are discussed in the first instance.
Later, we move on to attempts of market modeling within the behavioral framework. Early models based on beliefs and preferences of investors do well with explaining some aspects, but lack power to describe other peculiarities of market behavior. Hence, the Generalized Behavioral Model is developed that aims to explain the whole range of market anomalies described in this book. In a few recent years, we experienced market turbulences on the scale and scope not seen since the Great Depression in the s. First, the problems started in the United States with the burst of the real estate bubble and the credit crunch.
Soon the crisis spread globally. Its spin-off effects revealed major weaknesses of the Eurozone, particularly unbearable levels of public and private indebtness in a few member states. We investigate how investor biases and market inefficiency may impact financial and investment policy of corporations.
Ethics depends on the morality choice of behavior to be performed.
Behavioural finance: the role of psychological factors in financial decisions
In making investment decisions, investors are required to consider the ethics of investing. It indicates that investment choices that are in accordance with ethical principles, morals and values that are upheld by investors. Individuals or groups who are very concerned about ethical, moral, religious principles should in theory invest their money according to the principle Miller, in Sparkes and Cowton, Thus, investment decision-making by investors will be measured ethically in the right and wrong that includes the implementation of behavior in conformity with moral and legal principles in good and bad.
Based on the theory of subjective well being, behavioral finance theory, and issue contingent model, this research raises the title of analysis of the influence of investment ethics on the behavior of capital market investors and its impact on capital market investors' financial satisfaction.
This research is a research that will provide new knowledge about ethics to behavior of capital market investor.
Furthermore, this study will also provide new knowledge about whether whether the behavior of capital market investors will affect the financial satisfaction of capital market investors. Finally, this study will also discuss whether ethics affects the financial satisfaction of capital market investors through investor behavior.
This theory helps in the search for explanations for human economic decisions that combine theories of behavioral and cognitive psychology with conventional finance and economics Baker and Nofsinger, Theory of behavioral finance arises from the absence of psychological factors in understanding behavior. The traditional financial paradigm emerges from a market-level perspective and it produces uncertainty in understanding human behavior. In the period and , psychology began to examine to understand economic decisions such as Slovi , on the behavior of stock brokers, Tversky and Kahneman on the bias of investor behavior and Kahneman and Tversky, which gave birth to prospect theory Shefrin, Over time, this journal about psychology begins to affect finances Shefrin, At a conference hosted by the American Finance Association in held an annual meeting on behavioral discussion Baker and Nofsinger, The discussion on behavioral finance continues and coloring the next annual meeting.
In , DeBondt and Thaler and Shefrin and Statman published a psychology-based journal on the behavior of capital market investors Baker and Nofsinger, Behavioral Finance overcomes inconsistencies through explanations based on human behavior both individuals and groups. Through Behavioral Finance, the reasons why and how markets can become inefficient and irrational behavior of investors can be revealed.
Behavioral Finance says that thought processes in the human brain often process information by using shortcuts and emotional filters Baker and Nofsinger, This indicates that the human thought process is not the same as the computer. The human thought process affects financial decision-makers in which such persons often act in irrational action, breaking traditional concepts on a regular basis from risk aversion and making suspect errors in the estimates made.
These issues are common in investor decisions, financial markets and corporate managerial behavior. Research shows that irrational behavior is sufficient to impact financial satisfaction from individual investors Barber and Odean, and Ezama et al. Thus, Behavioral Finance provides a space in studying the psychology of financial and economic actors by taking cognitive and behavioral points to answer the reasons for making irrational decisions in the capital market Lovric et al.
Subjective Well Being The importance of one's happiness is influenced by one's perception of the things that bring about happiness itself. Subjective Well Being says that the definition of subjective quality of life gives each individual the right to decide whether his life is worthwhile Diener Subjective Well Being was introduced by Warner Wilson in in expressing the correlation of recognized happiness.
At that time, Subjective Well Being theory was more attributed to the demographic factors of the individual and what was his contribution to subjective well-being or happiness. Wilson concluded that happy individuals are young, healthy, educated, income-generating, optimistic, open-minded, unselfish, religious, and confident individuals Diener et.
However, subsequent studies have changed the point of view of Subjective Well Being theory. The modern Subjective Well Being looks more at the psychological emphasis factor. In a study conducted by Diener Subjective Well Being emphasizes modern adaptation, the influence of disposition, objectives and coping strategies.
Many studies contribute to financial relationships and financial satisfaction in influencing individual happiness in life or life satisfaction Easterlin, , Van Praag, , , Van Praag and Kapteyn, , Hagenaars, in Toscano et al. This is consistent with the basis of the utility theory which says that the increase in income in general is desirable from the perspective of individuals and individuals will do their best in such financial situations to maximize their utility. Thus, the level of satisfaction is derived from certain financial situations and will ultimately be one of the determinants in individual satisfaction.
So it can be concluded that finance is an important life domain in modern society Xiao et al, The concept of financial satisfaction is the satisfaction of financial situation in the present and will continue to be a goal in a family Zimmerman, in Joo and Grable, Meanwhile, according to Diener and Biswas Diener , financial satisfaction can be a mediator between income and happiness because financial satisfaction is influenced by many factors other than income while financial satisfaction has income as the main input.
Financial satisfaction and its impact on quality of life have sprung up in several decades of research Xiao et al. Satisfaction of a financial status will increase personal satisfaction and wider life satisfaction. The same holds true that financial difficulties and dissatisfaction with financial status will lead to stress and depression.
Investor behavior The development of investor behavior has changed from the classical economic theory of rationality from economic agents to modern financial behavior theory. In conventional financial theory, the investor is assumed to be the maximum performer of rational wellbeing by following the basic financial rules and determining the investment strategy only from risk and return considerations Maditinos et. In the classical theory of economics, the rationality of economic agents is one factor to explain the economic process.
However, recent research findings suggest that individual investor behavior has different investor behavior types with different types of bias Ezama et al. That way, the importance of considering the irrationality of investors begins to be taken into account in understanding the behavior of individual investors. Research suggests that irrational behavior can negatively impact the financial welfare of individual investors Barber and Odean, On the other hand, the use of behavioral bias can encourage investors to better decisions and help individuals to overcome individual investment behavior Thaler and Bernartzi, Research in investment psychology notes the existence of various variations in decision-making behavior for investors known as psychological bias Ali, The bias that exists in that behavior has an impact on almost all types of decision-making, especially decisions related to investment and money.
Commonplace in decision-making behavior refers to how to process information in generating decisions and preferences possessed by individuals. The bias will affect the mind and the various situations. However, a bias in investment will lead individuals to less favorable decisions and negatively impact. In basic human nature, bias often affects all types of investors. Therefore, many studies have modeled in explaining the implications of irrational investor behavior in the capital market Barberis, et. Ethics of Investments Ethics is a set of rules that define right and wrong behavior that helps individuals distinguish between facts and beliefs, decide on the exposure of issues and decide on moral principles used in certain situations Chong and Anderson, Ethics help the individual to organize and manage the actions taken with due regard to morale and confidence in the decision-making process.
In the use of ethics, the individual must have an awareness that the action should be in accordance with the moral and beliefs held. Ethical behavior is an action that conforms to a substantive normal standard Schwartz, So investment with ethics is the use of ethical and social criteria in selecting and managing its investment portfolio Cowton, in Hussein and Omran, Ethics has become a particular concern in investment especially capital investment. Investors begin to invest their money by ensuring that investments are in harmony with ethics. In the selection of companies to invest, investors have made the selection process by using criteria of moral criteria and environmentally friendly Wilson, It also evolves www.
Moral and ethics have become the driving wheel in the economic market Warde, in Chong and Anderson, The contingent model issue by Rest states that moral behavior can be predicted in 4 stages of recognizing moral issues, making moral judgments, performing moral intentions and acting in accordance with moral concern Jones, In the four stages, the factor of moral intensity and environmental factors organization influence in the process whereby it can affect the whole or part of the stage Kelley and Elm, Research conducted by Kim and Rasiah shows that attitude and behavior control does not significantly affect behavior, only social factors that have an effect on behavior.
The impact of social factors on behavior is also reflected in the research of Jansson and Biel and Anand and Cowton The data of this research are primary data and secondary data. Primary data in this study were collected by using questionnaires either online or printed. While the secondary data obtained from the publication of both print and online are available to the public. Questionnaire data is distributed to various securities companies in South Sulawesi Indonesia as many as 16 securities companies. South Sulawesi Province is one of the provinces that has a relatively high income growth rate of population in eastern Indonesia and one of the Indonesia Stock Exchange target for capital market development.
This study uses samples from capital market investor population in South Sulawesi, Indonesia. Questionnaires are distributed to capital market investors in South Sulawesi Indonesia who have made transactions more than 1 time and are still active as a capital market investor. Data should not be multivariate normal distribution and sample size should not be large Ghozali, The first stage is testing the quality of data through the assessment of model outer or measurement model.
While the second stage is inner test model. Those stages are outer model and inner model. Convergent validity is the measurement of the extent to which the size correlates positively with the alternative size of the same construct. Meanwhile, discriminant validity is the extent to which the construct can be completely different from the other www.
Finally, internal consistency realibility or composite realibility is an estimate of the reliability based on the intercorrelation of the observed indicator variables. Convergent Validity The step in evaluating the outer model begins by looking at convergent validity through its loading factor. Individual reflexive sizes are said to be high if they correlate more than 0. However, according to Chin, in Ghozali, for a preliminary study of the development of measurement scale the loading values of 0.
In this research will be used the load factor limit of 0. At the beginning of the analysis, this study will eliminate the indicator having its loading factor below 0. Next, the research will be modified by re-executing the model. Modification model is done by issuing indicators that have a value of loading factor below 0.
In the modification model as in table 1 it shows that all the loading factors www. Thus, all constructs now satisfy the validity with the loading factor above 0.
Furthermore, convergent validity is also assessed through AVE or average variance extracted. Hair suggests that if the model has an AVE above 0. After eliminating the loading factor below 0. Discriminant Validity Cross loading will be used as a parameter to examine discriminant validity.
If the model has good discriminant validity, then the cross-loading results should show that the indicator of each construct must have a higher value than the indicator in the other construct Hair, Thus, all indicators can be valid and accepted. Composite Relialibility Specific composite reliability values that can be accepted in exploratory research are ranged from 0. Both composite reliability and cronbach alpha of each construct have values above 0. Thus, all variables in this model have internal consistency reliability.
Based on the above data, this model can be concluded to have good convergent validity, have good discriminat validity and good internal consistency realibility. Structural Model Testing Inner Model Inner model or structural model testing is done to see the relationship between construct, significance value and R-square of the research model.
The structural model is evaluated by using R-square for the t test dependent construct as well as the significance of the structural path parameter coefficients. Table 4 R-Square Value www. These results indicate that The R-square value for the financial satisfaction variable is 0.
Hypothesis Testing The basis used in testing the hypothesis is the value contained in the output path coefficients. Table 5 provides estimation output for structural model testing. In this case the bootstrap method is performed on the sample. Testing with bootstrap is also intended to minimize the problem of data abnormalities, test results with bootstrapping from the analysis PLS is as follows Hypothesis 1 which states that the ethics in investing significant effect on proven financial satisfaction.
This is because the results of hypothesis testing 1 shows that the ethics in investing with financial satisfaction shows the value of the coefficient path of 0. The value is greater than t-table 1. This means that the ethics in investing significant effect on financial satisfaction. Hence hypothesis 1 is accepted.
Hypothesis 2 which states that ethics in investing significant effect on proven investor behavior. This is because the result of hypothesis 2 testing shows that the ethics in investing with investor behavior shows the coefficient value of 0. This means that the ethics in investing has a significant effect on investor behavior. Thus hypothesis 2 is accepted.
This is because the result of hypothesis 3 testing shows that investor behavior with financial satisfaction shows the value of path coefficient of 0, with t value equal to 7, This means that investor behavior has a significant effect on financial satisfaction. Thus hypothesis 3 is accepted.
Hypothesis 4 which states that Ethics has a significant effect on financial satisfaction through proven investor behavior. This is because the results of hypothesis testing 4 shows that ethics affect financial satisfaction through investor behavior shows the value of the coefficient path of 0. This means that ethics has a significant effect on financial satisfaction through investor behavior.
Thus hypothesis 4 is accepted. Discussion The Influence of Ethics on Financial Satisfaction Of Capital Market Investor Based on the data analysis of respondents, empirically ethical variables turned out to have a significant effect on financial satisfaction. The value of the path coefficient found between the two variables was statistically significant. The direct contribution of ethical variable to positive financial satisfaction and its influence is significant, so ethics is a good predictor of financial satisfaction of capital market investors in South Sulawesi.
The positive influence of ethics on financial satisfaction of capital market investors in South Sulawesi contradicts the neo-classical economics theory. Neo-classical economics assumes that investors only have concerns about the two characteristics of the investment that are expected risk and expected return Hickman et al.
The theory shows that capital market investors in South Sulawesi do not have the same concern with neo-classical economics theory. Thus, capital market investors in South Sulawesi give more consideration to ethics than risk and return. Investment ethics provides incentives for investors to screen. In the screening process, investors are limited by certain investments to be incorporated into their investment portfolio.
In other words, ethical investment diversification will provide limited space to form a portfolio with minimized risks from the investments that have been selected. Conventional portfolio theory introduces investors that investment risk can be minimized without reducing return by diversification Michelson et. Based on the above explanation, the portfolio of capital market investors has most likely not diversified with the maximum but still provide financial satisfaction.
Thus, it can be assumed that capital market investors who consider the ethics of investing have greater risk exposure than traditional or non ethical investment Carswell, ; Michelson et. The Influence of Investment Ethics on Investor Behavior of Capital Market Referring the results of respondents data indicated that the ethical variable empirically proved to have a significant effect on investor behavior.
The direct contribution of ethical variable to positive investor behavior and its influence is significant, so that ethics is a good predictor for the behavior of capital market investors in South Sulawesi. Thus, the behavior of capital market investors in South Sulawesi in this study is caused by ethics. The increase in capital market investor behavior in South Sulawesi is influenced by the increase of ethics.
Ethics affect investor behavior is also shown in Anand and Cowton , Wilson, , Hoffman et. The positive influence of investment ethics on investor behavior proves that ethics can be a driving factor in the behavior of capital market investors in South Sulawesi. Sparkes states that ethics can normatively have implications for the execution of actions with the intention of being a pushing or inhibiting factor for individuals to behave.
The ethics present in the individual is also influenced by several aspects of the individual's life. Investors who uphold ethics will ensure that the selected investment will be consistent with personal values Hussein Investor behavior that is also proven to be positively influenced by investment ethics is also consistent with the issue of contigent model theory. Kelley and Elm and Hoffmann emphasize that the issue of contigent model theory shows that ethical behavior-based processes occur by being influenced by the moral intensity of the ethics formed from the environment in which the individual is located.
In behaving, the capital market investor will ensure and screen investment that will be done is in accordance with the moral intensity of ethics before making a decision to invest. With reference to the moral intensity of the investor ethic, the investor ensures the selected investment does not conflict with the ethics adopted. The same experience is also expressed by Hussein who said that investors who have the ethics of investment will choose an investment that is consistent with the value embraced so as to bring awareness to suppress companies that do not have concern for ethics and put pressure on companies that do not show ethical care for changed.