MBA THESIS

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Financial Crisis Impact on Kuwaiti Investors' Behaviour and Decision-Making

BY

Sabeeka Abdullah Al-Qadeeri (KUWAIT)

A thesis submitted in partial fulfilment of the requirements for the degree of Masters of Business Administration (MBA) of the Maastricht School of Management (MSM), Maastricht, the Netherlands,

February 21, 2010

MB BA TH HESIS
THESIS TOPI IC Financial Cris sis Impact on o Kuwaiti i haviour and d Decision-Making Investors' Beh SUP PERVISOR RS NAME E Dr. Nabil El-H Hilali STU UDENT ID D: KW W/KMBS/ #1128 # THESES SUB BMISSION DEADLIN NE Feb bruary 21, 20 010 SUBMITT TED BY: Sabeeka Abdullah A A Al-Qadeeri I INTAKE AND A GROU UP NUMB BER I Intake 8, Group G 4 COUNTER RPART: K Kuwait SUBMISSI ION DATE E F February 21 1, 2010

Thi is statemen nt should be e completed d and signe ed by the st tudent prod ducing the thesis.
Decl laration and Statement of f Authorship: : 1. 2. 3. 4. 5. 6. I hold a copy of this thesis, , which can be e produced if the t original is s lost/damaged d. This thesis is my original work w and no part p of it has been copied fro om any other students wor rk or from any y other source except e where due acknowle edgement is made. m No part of thi is thesis has been written fo or me by any other o person except e where s such collabora ation has been n authorised by y the superviso or concerned and a is clearly acknowledged d in the thesis s. I have not pre eviously subm mitted or curren ntly submittin ng this work fo or any other th hesis. This work m may be repro oduced, comm municated, co ompared and archived for the purpose e of detecting g plagiarism. ssion for a cop py of my mar rked work to be b retained by y the School f for review and d comparison, I give permis including revi iew by extern nal examiners.

I un nderstand t that:
7. Plagiarism is the presentati ion of the wor rk, idea or cre eation of anoth her person as though it is your y own. It is s heating and is i a very ser rious academi ic offence that may lead up to expuls sion from the e considered ch program. Pla agiarised mate erial can be drawn d from, and presented in, written, , graphic and d visual form, including elec ctronic data, and a oral prese entations. Plag giarism occurs s when the or rigin of the material m used is s not appropria ately cited. giarism is the act of assistin ng or allowing g another perso on to plagiaris se or to copy your y work. Enabling plag

8.

Last N Name

Fi irst Name

S Signature

Al-Qad deeri

Sabeeka S

Source: This doc cument has been adapted a from http p://mams.rmit.edu u.au/7ksj9bbov09 94.doc

ACKNOWLEDGEMENTS

I would like to thank the almighty Allah for giving me the strength, patience and willingness to go through my MBA program and complete this journey.

I would like to express my gratitude to my precious family for making huge efforts to love, support and encourage me whenever needed. Thank you.

I also want to express my greatest appreciation to Dr. Nabil El-Hilali for his supervision, guidance, and patience throughout the MBA program and thesis progress. His continuous encouragement to show my best and his belief in my abilities are highly appreciated. Thank you.

I have to thank Kuwait Maastricht Business School for providing such great and very-much useful courses. Special Thanks go to the KMBS faculty, our teachers and mentors for being patient, supportive, creative and intelligent in their methods. Thank you

Finally, I would like to thank the KMBS participants and students. Thank you for making my days at KMBS joyful as much as they were useful. I had the privilege of meeting great people, making good friends, and establishing rewarding work relationships.

Sabeeka Abdullah Al-Qadeeri February 2010

ABSTRACT

Behavioral Finance is a relatively new field in the economic world, and has become a subject of great interest to economists and financial analysts. The fact that this field is considerably new, most financial and investment professionals have been overlooking the importance of investors' behavior and habits when analyzing market trends. Ignoring these behavioral factors may generate incorrect and inaccurate market analysis. Therefore, when the 2008 financial crisis hit the economy and caused market crashes, it helped highlighting the significance of behavioral finance, and it altered these behavior biases throughout the global financial markets, including the Kuwaiti financial market.

In order to have a complete overview of the market, its trends and its stocks performance, one cannot eliminate the investors behavioral pattern, as it is as important as the standard financial methods and tools. Like the other international stock exchanges, Kuwait Stock Exchange (KSE) is exposed to investors' various behavioral biases, as most of its abnormal trends are influenced by them. This research study seeks to go beyond the known traditional financial theories and shed the light on the behavioral perspective of Kuwait financial market. It also aims to make a reasonable comparison between the investors' actions and decisions before and after 2008 financial crisis, in terms of behavioral and financial aspects.

Amongst the key findings of the research is the major dependence of Kuwaiti investors on the various behavioral biases when making their equity-investment decisions. In addition, data interpretation has confirmed the impact of the financial crisis on investors' behavior and attitudes in the Kuwaiti financial market. These findings were based on a sample of 241 of randomly selected local individual investors trading in Kuwait Stock Exchange.

Key words: Behavioral Finance, Traditional Finance, Financial Crisis Impact, Kuwait Stock Exchange.

II

TABLE OF CONTENTS

ACKNOWLEDGEMENTS ABSTRACT TABLE OF CONTENTS LIST OF FIGURES LIST OF TABLES CHAPTER ONE: INTRODUCTION 1.1 INTRODUCTION 1.2 OVERVIEW 1.2.1 1.2.2 1.2.3 Behavioral Finance Traditional Finance and Market Efficiency Kuwait Stock Exchange and Investors' Behavior

I II III VI VII 1 1 1 1 2 3 3 3 4 5 5 6

1.3 PROBLEM DEFINITION 1.4 RESEARCH OBJECTIVES 1.5 RESEARCH QUESTIONS 1.6 RESEARCH METHODOLOGY 1.7 LIMITATIONS OF THE STUDY 1.8 THESIS STRUCTURE

CHAPTER TWO: LITERATURE REVIEW 2.1 INTRODUCTION

7 7 7 7 8 11 12 13 15 15 16 17

2.2 BEHAVIORAL FINANCE 2.2.1 2.2.2 2.2.3 Definition Behavioral Finance vs. Traditional Finance and Market Efficiency The Structure of the Behavioral Finance Model
2.2.3.1 The Behavioral Model of Prospect Theory 2.2.3.1.1 The Emotional Factors: Loss Aversion, Regret, and Disposition Effect 2.2.3.2 The Behavioral Model of Heuristics 2.2.3.2.1 Bounded Rationality Concept 2.2.3.2.2 The Social Factors: Group Think, Herding, and Conformity 2.2.3.3 The Behavioral Model of Cognitive Biases

III

2.2.3.3.1 The Cognitive Biases: Overconfidence, Illusion of Control and Representativeness

18 20 22 22 22 23 24 26 26 26 27 29

2.2.4 2.3

Behavioral Finance Case Studies in the Global Financial Markets

THE FINANCIAL CRISIS 2.3.1 2.3.2 2.3.3 2.3.4 Definition The 2008 Global Financial Crisis Financial Crisis Impact on Investors' Behavior and Attitude Empirical Researches about Financial Crisis Impact on Investors' Behavior

2.4

KUWAIT ECONOMY OVERVIEW 2.4.1 2.4.2 2.4.3 Kuwait Economy Background Kuwait Financial System Kuwait Stock Exchange

2.5 RESEARCH CONCEPTUAL MODEL

CHAPTER THREE: RESEARCH DESIGN AND METHODOLOGY 3.1 INTRODUCTION

31 31 31 31 32 32 34 34 35 35 36 36 38 38

3.2 PROBLEM STATEMENT 3.3 RESEARCH OBJECTIVES 3.4 RESEARCH QUESTIONS 3.5 RESEARCH HYPOTHESES 3.6 RESEARCH DESIGN 3.6.1 3.6.2 3.6.3 3.6.4 3.7 Research Approach Research Purpose Research Methodology Time Horizons

DATA COLLECTION METHOD

3.8 TARGET POPULATION AND SAMPLING METHOD 3.8 DATA ANAYSIS

CHAPTER FOUR: DATA ANALYSIS, FINDINGS, AND DISCUSSIONS 4.1 INTRODUCTION

40 40 40 40

4.2 GENERAL INFORMATION ANALYSIS 4.2.1 Response Rate IV

4.2.2 4.2.3

Respondents' Profile Analysis Respondents' Profile Analysis vs. Decision-Making Process

40 43 44 44 45 48 51 51 52 57 61 61 65 66 66 67

4.3 CONCEPTUAL VARIABLES ANALYSIS 4.3.1 4.3.2 4.3.3 4.3.4 4.3.5 Reliability Test of Pre and Post Crisis Factors Descriptive Analysis of Pre and Post Crisis Factors Correlation Analysis of Pre and Post Crisis Factors T-Test Analysis: Paired Sample of Pre and Post Crisis Factors Regression Analysis of Pre and Post Crisis Factors
4.3.5.1 Regression Analysis of Pre-Crisis Factors 4.3.5.2 Regression Analysis of Post-Crisis Factors

4.3.6

Structural Equation Modeling SEM

4.3.6.1 Structural Equation Modeling Results of Pre-Crisis Factors 4.3.6.2 Structural Equation Modeling Results of Post-Crisis Factors

4.3.7

Investors' Views Analysis

4.3.7.1 Investors' Views on Financial Crisis Impact 4.3.7.2 Investors' Views on Behavioral and Financial Elements

CHAPTER FIVE: CONCLUSIONS, RECOMMENDATIONS AND FUTURE RESEARCH 5.1 INTRODUCTION 71 71 71 71 74 75 76

5.2 CONCLUSIONS 5.2.1 5.2.2 Pre-Crisis Behavioral and Financial Factors Post-Crisis Behavioral and Financial Factors

5.3 RECOMMENDATIONS 5.4 FUTURE RESEARCH

REFERENCES BIBLOIGRAPHY

78 81

APPENDICES APPENDIX A: BIOGRAPHY V Questionnaire

LIST OF FIGURES

2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 3.1 3.2 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13 4.14 4.5 4.6 4.7

The Disciplines and Theoretical Sources of Behavioral Finance The Structure of Behavioral Finance A Hypothetical Weighting Function Process of Human Decision Making The Cognitive Biases Model The Interrelation between Market Movement, Information, and Investor Behavior Accumulated Net Buying of Investors in Thailand (in Baht) The Research Conceptual Model The Proposed Hypothetical Model Research Approaches Respondents' Age Group Respondents' Educational Background Respondents' Reason of Investing in Kuwait Stock Exchange Respondents' Source of Investment Knowledge Relative Importance of Behavioral and Financial Elements (in %) The Proposed Hypothetical Model: (Pre-Crisis Part) The Proposed Hypothetical Model: (Post-Crisis Part) The Pre-Crisis Conceptual Path Model using Structural Equation Modeling The Post-Crisis Conceptual Path Model using Structural Equation Modeling Investors' Views on the Financial Crisis Impact Investors' Weights of Behavioral Factors vs. Financial Factors Behavioral Elements Weighted Score Financial Elements Weighted Score Differences in Weighted Scores before and after Crisis Relative Importance of Behavioral and Financial Elements (in %) The Proposed Hypothetical Model: (Pre-Crisis Part) The Proposed Hypothetical Model: (Post-Crisis Part)

10 12 13 16 18 21 25 30 33 34 41 41 42 43 48 52 57 62 65 67 68 69 70 70 48 52 57

VI

LIST OF TABLES

2.1 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13 4.14 4.15 4.16 4.17 4.18 4.19 4.20 4.21 4.22 4.23 4.24 4.25 4.26 4.27 4.28 4.29

The Development of the Kuwait Equity Market Response Rate Investors' Profile vs. Decision-Making Process Pre and Post Crisis Factors Reliability Test Pre-Crisis Factors Reliability Test Post-Crisis Factors Reliability Test The Relative Importance and Ranking of Factors before the Financial Crisis The Overall Relative Importance and Ranking of Factors Correlation Strength and Direction Description Correlation among Pre-Crisis Factors Correlation among Post-Crisis Factors Paired Sample T-Test among Pre and Post-Crisis Factors ANOVA: Pre-Crisis Financial Factors Regression Analysis: Pre-Crisis Financial Factors Removal Model Summary of Pre-Crisis Behavioral Factors Beta Coefficients of Pre-Crisis Behavioral Factors ANOVA: Pre-Crisis Behavioral Factors ANOVA: Pre-Crisis Behavioral vs. Pre-Crisis Financial Factors Beta Coefficients of Pre-Crisis Behavioral vs. Pre-Crisis Financial Factors Beta Coefficients of Post-Crisis Behavioral Factors ANOVA: Post-Crisis Behavioral Factors Beta Coefficients of Post-Crisis Financial Factors ANOVA: Post-Crisis Financial Factors Beta Coefficients of Post-Crisis Behavioral vs. Post-Crisis Financial Factors ANOVA: Post-Crisis Behavioral Factors vs. Post-Crisis Financial Factors Post-Crisis Behavioral Factors vs. Post-Crisis Financial Factors Pre-Crisis Regression Weights using AMOS Chi-Square of Pre-Crisis Model Goodness-of-Fit Index of Pre-Crisis Model Comparative Fit Index of Pre-Crisis Model VII

28 40 44 44 45 45 46 47 49 49 50 51 53 53 54 54 55 56 56 58 58 59 59 60 60 61 63 63 64 64

4.30 4.31

Root Mean Square Error of Approximation of Pre-Crisis Model Model Fit Summary of Post-Crisis Conceptual Model

65 66

VIII

CHAPTER ONE: INTRODUCTION

1.1 INTRODUCTION
This chapter will provide a general outline of the thesis structure. It begins with an overview of the importance of the chosen topic, which is an attempt to understand the investors behavior in stock markets, as well as the traditional financial aspects in the investors decision-making. After that, the impact of the global financial crisis on the traditional Kuwaiti investors behavior will be investigated. This will lead to an assessment of the relationship between the market overall performance and the investors behavior and decision-making.

1.2 OVERVIEW
To stay competitive in todays financial market, and to take advantage of the risen investment opportunities, a continuous stream of skills, tools and knowledge is needed. Therefore, the investors behavioral trend is constantly moving and changing, from time to time, within various markets. There are many factors that play a major role in influencing the investors decision, whether to buy, sell, participate, merge, or buy-out. These factors can either be financial, or psychological. The main focus of this thesis is to understand the key factors that determine the investment decision-making techniques in Kuwait Stock market and the impact of the global financial crisis on such decisions. Having an investment career that has been moving along the investors behavioral trend and having to deal with different types of investors, it is very crucial for me to understand the influential factors that affect the investors behaviors and their decision-making process. In the past year, my career has shifted from being an Investment Manager to Investment Risk Manager. This does not only reflect a career change, this also reflects the market change, the behavior change, and the future focus of investment. It means that the market that once was focusing on investing money in different stocks and ventures is now shifting the focus towards the risks associated in the investments and the various views and biases of investors. This can be considered as one of the consequences of the Global Financial Crisis of 2008 and its ongoing impacts.

1.2.1 Behavioral Finance

Until recently, the investors behavior and influencing biases have been overlooked when it comes to market and stocks performances. The main focus and interpretation to such performances have always 1

been based on general financial tools and analysis. However, many behaviorists argue that the financial aspect is not the only aspect that has an effect on the economic conditions. For instance, Daniel Kahneman, a psychologist, won the Nobel Prize in Economics in 2002 for having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty. His work, with his psychologist colleague Amos Tversky, has led to understand and appreciate the importance of behavioral finance (Shapira and Venezia 2000). Behavioral finance, as defined by Sewell (2008), is a theory that associates the psychological variables and their emotional responses with the personal and general economic conditions. It combines both psychology and economics to explain how and why investors act the way they do, and to analyze how that behavior has an effect on the market (Vias 2006). In other words, it shows what happens when emotional reactions are engaged in investment decisions that shape the stock market and impact the prices of stocks, as well as the allocation of financial resources in both spending and saving habits. This indicates that in order to have a complete overview of the market and its performance, one cannot eliminate the investors behavioral pattern, as it is as important as the standard financial perspective.

1.2.2 Traditional Finance and Market Efficiency

Success in the stock market is the result of dedication and adherence to investment fundamentals, and analysis. The major part of fundamental analysis involves assessing the revenues, expenses, assets, liabilities and all the other financial aspects of a company. Fundamental and financial analysts look at such information to gain insight on a company's future performance. Based on these insights and assessments, investors and stock analysts make the investment selection and decision. In other words, financial information is the main key that investors make use of with their forecasting and evaluation techniques, and thus it helps creating a rational judgment and gives the courage to make deals based on the investment fundamentals, rather than some random picks and selections (Dagiliene et al. 2006). In 2006, Vias stated that Fama (1970, 1991) was the first to formalize the efficient market hypothesis (EMH), which considers financial markets as informational efficient. EMH claims that the market is efficient due to the fact that stock prices are a direct and precise reflection of the available information. The efficient market hypothesis supports the traditional finance model, which argues that the financial world is composed of rational driving forces that exist in efficient markets. However this is not the case, as it is important to acknowledge that the quality and source of information can shape the investors behavior, either positively or negatively, rationally or irrationally. Hence, there is an existing 2

relationship between investment fundamentals and the behavioral biases of investors. This research aims to test this relationship under the ongoing impact of 2008 global financial crisis in the Kuwait financial market.

1.2.3 Kuwait Stock Exchange and Investors' Behavior

The Kuwait Stock Exchange (KSE) is the national stock market of Kuwait since its establishment in October 1962. It is among the first and largest stock exchanges in the Arabian Gulf region, and is gaining global recognition among other national stock markets (Kamco Research 2009). The KSE is also one of the most active stock markets in the Middle East region as it uses the state of art technology. Investors in Kuwait Stock Exchange are privileged to use various methods and valuation techniques which enable them to seize the market's existing opportunities and create new profitable chances. For example, in October 2009 the Kuwaiti stock market has signed a 20 million Kuwaiti Dinar deal with Nasdaq to upgrade its trading system (Financial Channel, 2009). In addition, as in any other stock exchange, investors in KSE depend on two critical elements when making their investment decisions, financial information and behavioral factors. These elements influence the investors' outlook towards the listed stocks in the market, which may lead to irrational and inefficient behavior.

1.3 PROBLEM DEFINITION

Recently, more researches and studies are being carried out to analyze the behavior of stock markets' participants in order to measure the behavioral impact on the financial markets. Likewise, more researches are needed to be done in the Kuwaiti financial market as it is considered relatively new and, one of the emerging and developing markets. Like the other international stock exchanges, Kuwait Stock Exchange is exposed to investors' various behavioral biases, as most of its abnormal trends are influenced by them at varying levels. Most of the irrational behavior of investors and anomalies of the market within the Kuwait Stock Exchange are being overlooked, and the significant impact of behavioral finance is being ignored. This is mainly due to the fact that the behavioral finance is a relatively new and most investors in KSE are unaware of it or have minimal knowledge about it.

1.4 RESEARCH OBJECTIVES

A better understanding of the investors' behavior and decision-making process within the Kuwait Stock Exchange is needed to get a deep insight of the market's trends and prices changes, which ultimately 3

leads to a more efficient market. It is critical to state that in Kuwait Stock Exchange, there are a handful of major professional investors and the remaining of investors are small investors. Therefore, this research seeks to go beyond the known traditional financial theories and shed the light on the behavioral perspective of Kuwait financial market by achieving the following objectives: To identify the key factors which affect the individual investors in making their investment decisions in the Kuwait Stock Exchange prior the financial crisis. To make a reasonable comparison between the investors' actions and decisions before and after 2008 financial crisis in terms of behavioral and financial aspects. To assess the impact of the 2008 financial crisis on Kuwaiti investors' behavior and decisionmaking process. To explore the dependence of Kuwaiti investors on the various behavioral biases when making their equity-investment decisions, before and after the global financial crisis, in Kuwait Stock Exchange.

1.5 RESEARCH QUESTIONS

The proposed research questions aim to collect required data that would assess meeting the research objectives. The answers to these research questions should provide the essential information and insights needed to complete this research study. 1. How significant is traditional financial analysis to individual investors when making their investment decision in Kuwait Stock Exchange? 2. How dependent are individual investors on their behavioral biases when making their investment decisions in Kuwait Stock Exchange? 3. Which aspect does the investors in KSE mostly rely on? Traditional Finance factors or Behavioral Finance elements? 4. How does the 2008 financial turmoil have impact investors' behavior and action in Kuwait Stock Exchange in terms of financial decisions and transactions? 5. How does the financial crisis affect the investors' dependence on behavioral biases in Kuwait Stock Exchange?

1.6 RESEARCH METHODOLOGY

A quantitative research has been used with the purpose of meeting the assigned research objectives and providing empirical and practical evidence and answers to the proposed research questions. The quantitative research of this thesis is composed of primary data (questionnaire), and secondary data (literature review). The objective of using these tools is to investigate, develop, and create models, theories and hypotheses related to the topic of interest. The literature review is composed of theories and studies related to financial and non-financial influencing factors and their effect on stock market' participants when making investment decisions. Furthermore, the literature review gathers professionals and experts opinions in the field of study in order to meet the research objectives. For the primary data of this research, a questionnaire is used as a data collector instrument. The questionnaire has been prepared and derived from the literature review to gather suitable and satisfactory information. Moreover, the target group is randomly selected local individual investors and participants in the Kuwait Stock Exchange, who trade actively through their accounts, whether through listed brokerage firms or through their registered online accounts. Therefore, a sample of 350 questionnaires will be distributed to collect the needed data, which will be analyzed by using the SPSS software. The survey will be focused on the key factors affecting the behavioral and financial perspectives of Kuwaiti investors. The questionnaire will also attempt to measure the impact of 2008 global financial impact on these perspectives.

1.7 LIMITATIONS OF THE STUDY

Some limitations were faced while conducting the research and gathering the necessary and needed information and data. Among these limitations are: Researches and empirical studies in the field of behavioral finance are limited in the emerging and developing markets, especially in the Middle East Region, including the Kuwaiti market. This research is focused on individual investors as the financial institutions, brokerage firms and online trading providers were not included. Considering the fact that the field of behavioral finance is relatively new, there are no clearly determined and unified conditions that play a significant role in investors' behavior in the 5

market. Due to this fact, some real conditions and biases may be overlooked when conducting this research. In an emerging and developing market like Kuwait stock market, measuring investors' responses and capturing their true emotions can be tricky and difficult. The main reason for this issue is the absence of specialized tools such as Consumer Confidence Index, which assures the transparency of the market and efficiency of information.

1.8 THESIS STRUCTURE

Chapter One is the "Introduction" chapter, which consists of an introductory overview of the research study, problem definition, research objectives and questions, as well as the research methodology and limitations. Chapter Two is the "Literature Review" chapter, which provides a theoretical framework of the thesis topic. It gathers primary theories related to investors in terms of behavioral finance, traditional finance, market efficiency, and financial turmoil impacts. In addition, empirical evidences and case studies of the impact of financial crises, on investor's behavioral action and their decision-making process, are also discussed to support the presented arguments and theories. Finally, the chapter includes the research model that links the discussed topics, and the desired factors to be tested in this thesis. Chapter Three is the "Research Design and Methodology" chapter, which explains and discusses the research methodology, research objectives and hypotheses, data collection tools, and sample selection. It also gives details about the questionnaire structure and data analysis techniques. Chapter Four is the "Data Analysis, Findings, and Discussion" chapter, in which a detailed analysis of the collected data is done through various statistical techniques and practices. Chapter Five is the "Conclusions, Recommendations, and Future Research" chapter. Based on the overall findings and data, a final conclusion is given and some recommendations are provided. In addition, this chapter includes further suggestions for future researches and investigations related to the chosen topic.

CHAPTER TWO: LITERATURE REVIEW

2.1 INTRODUCTION
Financial organizations and numerous individuals underwent and still are suffering large losses due to the ongoing global financial crisis. Even with the largest financial corporations making the best risk management investments, the most important risk issues are usually ignored, the risk associated with investors' behavioral biases. Ignoring these behavioral factors will often result in inaccurate and incorrect decisions. In addition, the financial crisis has not only helped highlighting the importance of behavioral finance, it has also altered these behavior biases throughout the global financial markets, including the Kuwaiti financial market. This chapter aims to discuss the behavioral finance and its effect in the financial markets. It will define behavioral finance and elaborate on its models. It will also examine how the behavioral biases can impact the investors' judgments and decisions. Furthermore, this chapter will demonstrate the effect of the global financial crisis on the investors' behavior and decisions, mainly in the State of Kuwait.

2.2 BEHAVIORAL FINANCE 2.2.1 Definition

According to many researches and financial institutions, the market is composed of rational investors and educated professionals making decisions that make up the true value of assets. However, this is not always the case, as there are competing theories which state that the market is driven by other forces as well, including the irrational behavior of investors, which is also referred to as "Behavioral Finance". Behavioral finance has introduced psychology into finance in the 1950s. It is the study of the effect of psychological factors of investors' behavior on the market (Vias 2006). The study of behavioral finance is considered relatively new but it is undeniable that it has been gaining a global recognition, especially after Daniel Kahneman, a psychologist, has won the Nobel Prize in Economics in 2002 for having integrated insights from psychological research into economic science concerning human judgment and decision-making under uncertainty (Shapira and Venezia 2000). In addition, Gounaris and Prout (2009) have suggested that the current negative global turmoil has put the study of behavioral finance under the microscope, as most financial professionals are 7

relying on behavioral finance to get important insights about the financial collapse in order to make better decisions and more rational investments in the future. Several scholars and researchers have developed different definitions of behavioral finance. In 2008, Sewell provided a simple definition of behavioral finance as the study of psychological behavior of financial investors and the subsequent effect on markets. Additionally, the same author explained that behavioral finance is of interest because it helps explain why and how markets might be inefficient. Similarly, Maditinos et al. (2007) also termed behavioral finance as an emerging study that is gaining acceptance among economists, due to its success in explaining market reality, and in providing evidence related to behavioral psychological factors that play significant roles in financial decisions. Previously, Thaler (1993) has described behavioral finance as an "open minded finance", while Olsen (1998) have identified it as a new pattern of finance theory, which looks at the financial decisionmaking from a behavioral and psychological perspective. Even though there are a number of definitions of behavioral finance, they all revolve around one aspect. Commonly, the behavioral finance research/definition seeks to challenge the common assumption of traditional finance which states that investors always behave without bias and weight the financial factors rationally without considering the psychological ones. The reality is that in the world of finance and investment, people are not always rational; therefore, their financial decisions may be partially or wholly driven by their behavioral biases (Kim and Nofsinger 2007). Based on the various definitions of the previous mentioned authors, it can be concluded that behavioral finance is a theory that associates the psychological variables and their emotional responses with the personal and general economic conditions. It combines both psychology and economics to explain how and why investors act the way they do, and to analyze how such behavior has an effect on the market. In other words, it shows what happens when emotional reactions are engaged in investment decisions that shape the stock market and impact the prices of stocks.

2.2.2 Behavioral Finance vs. Traditional Finance and Market Efficiency

Recently, the focus in the financial markets shifted to behavioral finance due to its newly recognized importance. However, traditional finance, along with its broad and various methodologies of stock and company valuation, has been and still is playing an undeniable role in the economy world (Frankfurter et al. 2004). Furthermore, Blitterswijk and Karadzhov (2009) have discussed the major four methods 8

used to evaluate a company and its stock: Asset-based valuation, Income-based valuation, Cash Flowbased valuation and Market-based valuation. According to the authors, the asset-based valuation relies on the company's net worth, cash availability, and company's name and reputation, while the incomebased valuation focuses on the company's earning and its cash and dividend distributions to its shareholders. Similarly, the authors described the cash flow-based valuation as an approach that projects the company's future earning, cash income, and market value. The fourth method is the market-based valuation, which depends on the comparison between the company and other performing companies in the same industry. With regards to the traditional finance methods, Frankfurter et al. (2004) stated that finance in general and finance research and tools in particular are considered reasonable structures, and both are mainly used to guarantee the efficient implementation and functioning of the financial system. For more than 30 years, the traditional finance model has been dominating the economic field, arguing that the financial world is composed of rational driving forces that exist in efficient markets. Fama (1970, 1991), as cited by Vias (2006), has formalized the efficient market hypothesis (EMH) which considers financial markets as informational efficient. The hypothesis argues that the market is efficient when stock prices reflect all available information rapidly and precisely. This implies that the available information cannot be used to forecast stock prices and that there are a sequence of random events and changes in stock prices, which consequently lead to random and unpredictable behavior. However, the EMH has been recently attacked by various critics who believe that such hypothesis of rational markets is to be blamed for the current global financial crisis. Roger Lowenstein, a well-known financial journalist, firmly stated that "The upside of the current Great Recession is that it could drive a stake through the heart of the academic nostrum known as the efficient-market hypothesis" (Siegel 2009). Similarly, Ritter (2003) also criticized the EMH, stating that although it does not assume that all investors are rational, it does, however, assume that markets are rational; and although the EMH agrees that markets cannot predict the future, it yet assumes that markets are able to create fair forecasts of the future. On the contrary, the study of behavioral finance is considered as the "Inefficient Market Hypothesis", because it assumes that financial markets can be informational inefficient. Researches in the field of behavioral finance have been challenging the market efficiency hypothesis. For instance, Bondt (2004) declared that the traditional finance model became less credible due to extraordinary events in the financial markets, such as the Nasdaq bubble, and 1987 crash, which the EMH has failed to justify or explain. The author also added that while market anomalies like market bubbles and 9

beaters, and other market inefficiencies exist, these events and trends could not yet be justified using the traditional finance model, which failed to reflect the investors' reactions and behavior in response to their biases and emotions. According to the EMH and traditional finance theory, all investors and financial practitioners behave rationally and without biases. However, the behavioral finance theory defeats these assumptions by including the natural human responses in some circumstances, which sometimes deviate from rationality. Based on the researches and journals, behavioral finance does not only differ from traditional finance in the sense of investors' rationality and the market efficiency or lack of it. It also differs in the theoretical sources and views. In other words, the traditional finance model relies on statistics, economics and mathematics to research and explain its theories, while the behavioral finance model looks at it from a psychological and sociological angle as illustrated by Figure 2.1.
Figure 2.1 The Disciplines and Theoretical Sources of Behavioral Finance Psychology
is the scientific investigation of behavior and cognitive processes, including how these methods are influenced by the individual's physical, mental state, and external surroundings.

Sociology
is the systematic study of societal behavior of humans and groups. It mainly focuses on the effect on social relationships on people's attitudes and behavior.

Social Psychology
is the study of the behavior of people in social groups. This field researches how persons influence and relate to one another.

Economics
is the science that focuses on the production, allocation, and expenditure of wealth, and with various related problems of labor, finance, capital, and taxation.

Finance BEHAVIORAL FINANCE

is a discipline concerned with determining value and making decisions. This function allocates capital, including acquiring, investing and managing resources.

Behavioral Economics
is a discipline that integrates psychology and economics to accounts for how and why individuals sometimes make irrational or unscientific decisions regarding their spending habits, investment practices, and borrowing ritual.

Investing
to allocate money or capital into business, real estate, stocks, bonds, etc. for the purpose of obtaining an income or profit.

Behavioral Accounting
is a field that studies the behavior (psychology) of non-accountants and accountants concerning how they process accounting information and are influenced by the accounting function.

Source: Ricciardi (2005)

The Figure shows the different sources and elements that interact to create the general concept of behavioral finance. According to Ricciardi (2005), behavioral finance is composed of many branches of science and literature such as: psychology, sociology, social psychology, behavioral economics, 10

behavioral accounting, investment studies, economics and finance. Furthermore, and as Johnsson et al. (2002) confirmed, the existence of market irregularities and anomalies can easily be attributed to the irrational factors of the investor judgment and human behavior. Nonetheless, der Sar (2004) argued that even though the behavioral finance is increasingly recognized, the importance of the traditional finance model is not to be ignored. The author claimed that the standard financial model is still to be considered, as the economic world has no general agreement on the importance or impact of behavioral finance. In addition, the same author explained that according to Fama (1998) realized returns are associated with the risk and any unusual events may be considered as chance events with abnormal returns. Likewise, Fromlet (2001) asserted that the work of behavioral finance is not to eliminate the fundamental work of the traditional finance approach, it actually adds to the importance of unpredicted and irrational behavior to make it more realistic by incorporating the investors' reactions and behavior in the decision-making process. According to the same author, without the input and work of behavioral finance, some characteristic of the financial markets will be unclear and unexplained. The next section will further explain some models and findings in the study of behavioral finance to create a better understanding of how investors think and feel during the investment decision-making process and how their decisions impact the financial markets.

2.2.3 The Structure of the Behavioral Finance Model

The investors' psychological biases are not to be ignored as they may result in incorrect investment decisions which may affect the financial markets negatively. Therefore, understanding the investor's behavioral biases is crucial as it helps explain how some emotional and social elements, personal attributes, and interpretational skills can influence the investor's perception of uncertainty and risk. The basic structure of the behavioral finance model simply identifies the different theories which explain the various sources of investors' biases that consequently generate the market anomalies. As described in 2007 by Shefrin, bias is the tendency to make errors and prejudice decisions. There are many biases that the investors show within the process of decision-making. Figure 2.2 illustrates the major elements and components of the structure of the behavioral finance model. The structure focuses on three major and recognized theories which are the Prospect Theory, Heuristic Model, and Cognitive Biases Model. These models are considered alternatives to the theories that assume rationality in investors' decision-making process. 11

Figure 2.2 The Structure of Behavioral Finance BIASES Emotional Factors BEHAVIORAL MODELS
Prospect Theory Heuristic Model Cognitive Biases Model Loss Aversion Regret Disposition Effect

Bounded Rationality Social Factors

Group Think Herding Conformity

MARKET ANOMALIES

Cognitive Biases
Overconfidence Illusion of Control Representativeness

Source: Adopted from Suto and Toshino (2004), and De Carolis et al. (2006)

The main idea of the behavioral finance models is to discuss the various biases behind judgments and decisions under uncertainty. These biases mainly cover the Emotional, Bounded Reality, Social Factors, as well as Cognitive Biases.

2.2.3.1 The Behavioral Model of Prospect Theory

In 1979, Kahneman and Tversky proposed a theory that defies the expected utility theory, which states that investors calculate their utility rationally on the basis of risk/return of various decisions (Rizzi 2008). Prospect theory, provided by Kahneman and Trevsky, explained that investors' actual decisions were not necessarily based on rational calculations. As a matter of fact, the prospect theory mainly illustrates how investors behave under uncertainty which violate the theory of expected utility maximization of rational behavior under uncertainty (Shimizu 2007). Figure 2.3 shows that under the prospect theory, value is assigned to gains and losses rather than to final assets; also probabilities are replaced by decision weights (Sewell 2008). 12

Figure 2.3: A hypothetical weighting function

Source: Kahneman and Tversky (1979) and Sewell (2008)

2.2.3.1.1 The Emotional Factors: Loss Aversion, Regret, and Disposition Effect
Previously, the prospect theory was described by Barabazon (2000), as the theory that links the decision-process with different key "Emotional characteristics" such as Loss Aversion, Regret, and Disposition Effect. According to the prospect theory, Singh (2009) explained that Loss Aversion is when investors are much more bothered by potential losses than they are pleased by equivalent gains. For example, and as many economists noted, investors consider the loss of one dollar is twice as painful as the pleasure of receiving one dollar. This is consistent with the theory of Kahneman and Tversky of risk aversion which suggests that losses are emotionally-felt twice as strongly by investors in comparison with equal gains (Chira et al. 2008). Gounaris and Prout (2009) defined loss as: "A sensation experienced on a subjective level, whether through investments, through relationships, through jobs, or through deaths. Human do not like to experience loss, on any level, as it causes distress and pain. This aspect of human nature may seem simple and obvious. However, it is critical to understand its power over investing behavior and in relationships, as people avoid any subjective sense of loss at all costs". Furthermore, Singh (2009) expressed that people are willing to take more risks to avoid losses than to realize gains. Several studies demonstrated that when faced with sure gain, most investors are riskaverse, but when faced with sure loss, these investors become risk-takers. This explains how investors 13

tend to maximize their exposure to losing stocks, which is either by holding losing position or taking risky decisions to recap from losses (Menyah et al. 2004). Additionally, Rhoads (1997), as cited by Chira et al. (2008), stated that loss aversion will be more severe when the problem or issue is outlined in negative terms; and investors will make riskier decisions when faced by "negatively-frameddilemma". Another behavioral tendency that interferes with investors' decision, based on the prospect theory, is Regret. In 2008, Rizzi defined regret as backward-looking, while risk is forward-looking. He further explained that regret focuses on what could have been done but did not do. The regret bias usually leads the investors to hold on to a losing stock for too long hoping that its price will return to its purchase level, as a minimum, in order to sell it without regret (Fisher 2009). Moreover, Lin et al. (2006) found that investors' regrets are mostly about the outcomes if they did not invest. In addition, the same authors explained that investors' regret is majorly influenced by losses or gains relative to certain reference points rather than by the loss or gain size. Kahneman (1992), as cited by Lin et al. (2006), said that reference points are crucial as outcomes are compared to them, and are evaluated based on such comparison. If the comparison was poor and unfavorable, regret bias is triggered. In other words, regret emotional bias explains the underlying reasons that lead to loss aversion factor, as regret encourages investors to hold stocks with poor performance records. Regret bias can also involve avoidance of loss-recognition despite evidence of loss-occurrence. In their research, Weber and Camerer (1998) described the phenomenon of investors selling 'winning' assets that gained value, while keeping 'losing' assets and stocks that have lost value. This phenomenon is called the Disposition Effect. The same authors linked this bias to the elements of prospect theory: the reference points of gain and loss, and the tendency to be risk-takers when faced with potential loss and to be risk-averse when faced with guaranteed gain. Furthermore, many experimental studies and researches of international stock markets and exchanges showed that when the stock market is a bull market, meaning the prices of securities and stocks are rising, the trading volume increases, while the volume of trading is much lower when the market is a bear market with prices negatively falling. According to Ritter (2003), the fact that the trading volume rises in bull market and falls in bear market is a strong indicator that investors are unwilling to realize losses, and are more willing to recognize and realize gains. The same author argued that because of such tendency to avoid recognized losses, investors feel obliged to keep their securities which had fallen in value and sell their 'winners'.

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2.2.3.2 The Behavioral Model of Heuristics

The study of methodical errors in investors' perceptions, reasoning and decision-making process is defined as investor heuristic (Chira et al. 2008). Many behavioral finance experts and theorists believe that investors rely heavily on heuristics or rules of thumb to ease the process of decision-making, especially under uncertain conditions. According to Ritter (2003), such heuristics can lead to biases, which may then lead to wrong or unfavorable investment decisions. The importance of heuristics where brought to attention in late 1960s and early 1970s as the limitations and shortcoming of efficient markets and rational investment decision-making were discussed and highlighted by various studies and researches (der Sar 2004). In 2008, Rizzi further explained that investors normally develop heuristics, shortcuts or rules of thumb to process and understand financial market signals. Investigations of the different types and forms of heuristics, such as Bounded Rationality Concept, and Social Factors, are essential in order to understand how they can influence investors' behavior and shape their financial decisions.

2.2.3.2.1 Bounded Rationality Concept

The concept of Bounded Rationality was first introduced by Herbert Simon, a Noble Prize winner in Economics in 1978, to underline the role of emotions as a source of bounded rationality (Hanoch 2002). Furthermore, Foss (2003) argued that explaining human rational thinking in the presence of emotions was Simon's main concern when developing the concept of Bounded Rationality. The same author added that rationality and irrationality models will not be able to represent a realistic image of investors' behavior if emotions and reasoned thinking are not linked. Simon (1955), cited by Toshino and Suto (2004), implied that human decisions and judgment are usually made by using past-memory and new collected information and data. Figure 2.4 illustrates that investor's behavior is exposed to the influence of biases at three main stages in the process of decision-making; recollecting memories, choosing relevant information, and finally making the decision (Toshino and Suto 2004). According to Hanoch (2002), emotions work together with rational thinking to limit the options and to focus investors' attention on specific information. This is consistent with the fact that not all investors have the same intuitions and skills to interpret the information available in the financial market. The bounded rationality model explains that each and every investor is differently selective in choosing the relative pieces of information in order to make the final investment decision. Therefore, it is said that 15

the investors' bounded rationality is limited to the rate of information capacity and emotions as a function of information processing tool.
Figure 2.4: Process of Human Decision Making

Source: Toshino and Suto (2004)

2.2.3.2.2 The Social Factors: Group Think, Herding, and Conformity

The previously discussed biases were related to investors' personal psychological aspects in the decision-making process. However, there are social factors and aspects that influence the individual's decision making as well. The social factors are mainly observed when the individual's own decision depends on the decisions of others, or when the investor decision reflects the desired social responsibility and social status in the society. The social factors to be discussed are Group Think, Herding and Conformity. Group Think is generally described as the individual's acceptance of the organization and group decision without questioning the actions. The Group Think theory was first proposed by Janis (1972), as cited by Turner and Pratkanis (1998), which hypothesized that groups are most likely to be subjected to group think when they are under direct leadership, have limited experience and information, and under high stress with low self-esteem. In 2008, Rizzi pointed that the commitment plays a significant role in a group-think situation, where information is limited and critical thinking is lacked. It is believed that statements are repeated until they become satisfactory and acceptable regardless of the validity. The same author also added that the Group Think phenomenon is one of the major causes of the financial collapse, as investors used the same models, consultants and projections. 16

While commitment is the reason investors demonstrate group-think behavior, fear of the uncertain encourages the tendency to follow the herd. According to Johnsson et al. (2002), people are social beings who are influenced by their society and social environment. The same authors argue that even the most rational investors can be caught up in a Herding behavior when they base their decisions on others, which may result in irrational judgments and market fluctuations. More recently, Gounaris and Prout (2009) stated that humans are highly dependant on each other especially for survival and in riskinvolvement scenarios. Based on such herd mentality, many investors and market participants generally form social networks in the financial and economical markets. Such networks usually create bigger herds as investors start to form market rumors and price predictions, which can trigger herd-like behavior in the financial market. Similarly, Rizzi (2008) explained that most investors, even rational ones, tend to behave in a herd-like manner because it reduces the regret associated with decisions by recognizing that the result whether good or bad will be experienced by all peers. In other words, herding limits envy when market rises, and constrains panic and regret when markets collapse. This is incredibly true when investors do not have enough trading experience, when they are not exposed to the market 'exclusive' information, nor have the needed knowledge. Toshino and Suto (2004) illustrated that such scenarios trigger the herding tendency in investors which also reflects the power of social factors. In the same way, Conformity is another social factor that can be evoked in similar situations. Conformity is defined as the moral code and group standards that are essential for society (Gounaris and Prout 2009). It often helps investors to process and interpret the information faster and in an efficient manner, which reduce the amount of options, hence make more-sounded decisions. Investors which demonstrate such behavior usually make their decisions after getting the information from relevant social environment or by making their own conclusions based on the observations of others.

2.2.3.3 The Behavioral Model of Cognitive Biases

Cognitive Biases are of exceptional importance as they affect business decisions, belief creation, and opinion formation. Generally, cognitive biases enable quicker decisions and lead to more efficient actions. According to Friesen and Weller (2006), cognitive biases are what discriminate between rational and irrational behavior of investors. The same authors argue that market movements and fluctuations are not likely to be exclusively the result of rational reaction to information and incentives, as studies and evidence support the involvement of cognitive biases. Likewise, Christelis et al. (2009) explained that cognitive biases and skills may affect the investor's decision to buy, sell or hold stocks

17

or other financial assets. The most recognized cognitive biases are Overconfidence, Illusion of Control, and Representativeness.

2.2.3.3.1 The Cognitive Biases: Overconfidence, Illusion of Control, and Representativeness

Recently, more lights are being shed on the importance of social capital in the investors' judgments and decision-making. Adler and Kwon (2002), as cited by De Carolis et al. (2006), defined social capital as a "bonding" social perspective which shows the impact of internal ties within network relationships. In other words, the connections among parties within a group can create norms and traditions and build up trust within the group, and hence obtaining common goals easily. According to the authors, the social capital clarifies the investors' success when contacts and connections are utilized for personal benefit and gain. To create a clearer picture, De Carolis et al. (2006) adopted their own entrepreneurial theory that reflects the significance of the investors' cognitive biases on the market and economy. Figure 2.5 illustrates the cognitive biases of investors that affect their risk appetite, and decisions. In this model, the authors focus on the social capital with its various elements: Trust, Strong Ties, and Shared Codes and Languages. These elements describe the attachment, shared norms and ties within the investor's social network. Consequently, these social capital elements affect the main focus of this model which is the Cognitive Biases.

Figure 2.5: The Cognitive Biases Model

Social Capital
Shares Codes & Languages

Cognitive Biases
Overconfidence Illusion of Control Risk Perception Investor's Decision

Trust Strong Ties

Representativeness

Source: De Carolis et al. (2006)

18

The major cognitive biases discussed in this model are Overconfidence, Illusion of Control, and Representativeness. According to the authors, there is an obvious correlation between these cognitive biases, and the investor's risk perception, which as a result effects the investment decision and exploitation of entrepreneurial opportunities. Johnsson et al. (2002) defined Overconfidence as one of the elements of the financial behavior that has a major influence on the investment decision-making and may lead to the irrational behavior of investors that causes market inefficiency. The overconfidence bias reflects the investors' tendency to overestimate their knowledge and ability, especially in the stock markets. The overconfident investors tend to overestimate their ability of being accurate (Wang 2000). In addition, overconfident investors often deal with assumptions as given facts, and classify stocks as losing stocks, growth stocks and others based on their own views and experience, overlooking new information and ignoring the fact that some companies have the potential to grow. Illusion of Control is another bias described in the Cognitive Bias. Shefrin (2007), as quoted by Chira et al. (2008), defines the illusion of control as "tendency of people to believe they can control and/or influence outcomes that in reality they have no influence over. Johnsson et al. (2002) added that some investors have the sense and illusion of being able to influence and control the market outcomes. Theoretically, illusion of control is an extended sense of overconfidence when investors have unrealistic expectations and high optimism about their capabilities in changing the market and stock prices. Other reasons for such bias include illusion of having more self-control in risky choices, overestimating one's abilities and knowledge, and preference of self-chosen options (Fellner et al. 2004). The last cognitive bias discussed by the Cognitive Biases Model is Representativeness. This bias was explained by Tversky and Kahneman (1971), as cited by De Carolis et al. (2006), as the tendency of investors to use limited informational sources in order to make the final investment decision. This bias increases the chances of making a wrong decision, because statistically using larger sample when processing information eliminates the random and irrational events. However, these investors prefer using small sample and personal experience which may introduce illogical decisions. In addition, De Carolis et al. (2006) argued that the investors who discuss options and ideas with a limited number of consultant and advisors tend to have an overly positive outlook of the market, which does not necessarily reflect the reality. In general, the Cognitive Biases model shows the relationship between 19

the social network and the cognitive biases of the investors, and how these biases in return affect the investors' risk perception and decision making.

2.2.4 Behavioral Finance Case Studies in the Global Financial Markets

Despite the fact that the study of behavioral finance is relatively new, it has been used as an accepted tool to explain how investors and stock traders make decisions, and how these investment decisions affect the financial market. There are many feasible studies done throughout the world in international stock exchanges and financial markets in order to have a better understanding of the actual influence of behavioral finance on such markets. However, this research will focus on the studies that have been done to analyze the developing and relatively new stock markets. For instance, Hall and Taylor (2002) conducted their research to analyze the investor behavior in Argentina. The study focused on the different levels of vulnerability to shocks among investors. It showed that depending on the dynamic market scenarios, Argentinean investors change their behavioral patterns when adjusting their investment portfolios. In addition, the authors argued that if the traditional economists start considering the investor behavior as a significant factor affecting the financial market, then market anomalies and volatility may be less in the future. The authors also stated that economists usually focus on financial aspects, when in fact the non-financial aspects, such as the investor behavior, have a greater impact on the economy. Similarly, Oh et al. (2005) covered the aspect of trading online in Korea in their study due to the extraordinary number of Korean online-investors. The authors highlight how irrational behavior of investors can affect the market's outcome. In their performance comparison between online traders and non-online traders, it was found that online traders in the Korean Stock exchange are the worst performers, and are considered a 'noise-traders'. The authors believe that this is mainly due the fact that online trading allows investors with little or no experience to enter the market, and that some internet discussion groups may provide low relevant information for non-experienced investors, which ultimately leads to irrational transactions and market anomalies. Likewise, Kim and Nofsinger (2007) carried out an empirical study in the Asian financial markets in order to identify the various biases of investors in these markets. According to the authors, Asia is a fertile area and an interesting ground to study and analyze behavioral finance due to the variation in experience, capitalism and knowledge of the financial market participants. Their study showed that in 20

Asian financial markets, such as the Chinese stock market, the herding behavior is high and very noticeable among individual traders and investors during periods of high trading volume, rising bull market, and high market volatility. In addition, when the study compared the different investor types (foreign institutional investors, local institutional investors, and individual investors) in the Korean Stock Exchange, it was found that the best performers were foreign institutional investors and the worst were individual investors. The reason behind such result is the tendency of Korean investors to follow Group-think rather than to process available relevant information. Furthermore, the same authors stated that they aim to bring more focus on the behavioral finance in Asian financial markets. The authors argue that the importance of behavioral finance in the Asian financial markets does not rely solely on the fact that Asian financial markets are among the largest in the world, but also the fact that that Asians generally experience and demonstrate cognitive biases more than people of other cultures. All of the previously discussed studies and researches in the field of behavioral finance give emphasis to one concept, its great impact on the financial markets. Authors in this field do not deny the significance of the traditional finance nor reject the basic and fundamental investment analysis; however, they seek more recognition to be given to behavioral finance and its models.

Figure 2.6: The Interrelation between Market Movement, Information, and Investor Behavior

Financial Market Movement

Investors' Behavior and Perceptions

Source: Research Based (2009)

Information and Investment Analysis

Based on my understanding from these articles and studies, it was evident that there are interrelations between information and fundamental analysis, investor's behavior, and the financial market movement as shown in Figure 2.6. For example, the information element has an influence on both the investors' behavior and market movement. Information can encourage the investors to buy, sell or hold on to their investments. In the same way, the market is forced to rise or fall depending on the availability, accuracy, and relevance of information, as stated by the traditional finance theories. 21

The second factor is the investors' behavior and attitudes which impacts the market movement in terms of trading volume, stock price changes, and overall trading value. The investors' biases also can manipulate the information available in the market, as they can create informational networks regardless of the accuracy or the relevancy of information. As for the third factor, the market movement can trigger different biases in investors and affect their decision-making process. Furthermore, the market movement logically generates the data and information available to the investors. Therefore, it is undeniable that behavioral finance is a factor that should not be ignored when examining the Global financial markets as it plays a major role in this model.

2.3 THE FINANCIAL CRISIS 2.3.1 Definition

In his 2008 report prepared for the members and committees of the U.S. Congress, Mark Jickling pointed out that there is no specific definition of "financial crisis". However, as a financial economics specialist, he described the turmoil in the financial markets as a crisis when credit flow to businesses and households is disrupted, and the stream of goods and services is badly affected. Previously, De Bonis et al. (1999), as quoted by Allen and Snyder (2009), stated that a financial crisis is a wider range of disturbances, such as sharp declines in asset prices, failures of large financial intermediaries, or disruption in foreign exchange markets. In general, a financial crisis is often characterized by falling prices of stocks and devaluation of financial assets, deterioration in capital accounts, and collapse of credit systems, which lead to a severe disturbance to economy and financial markets. Moreover, Kamesaka and Wang (2004) explained that based on previous historical crises, despite the similarities, each financial crisis has its different triggers and effects, and leads to different economical and political results and outcomes.

2.3.2 The 2008 Global Financial Crisis

With regards to the ongoing global financial crisis, Baily et al. (2008) stated that it actually began in July 2007 with the collapse of the U.S. house market and credit bubble. The same authors also added that the credit fail had a domino effect, causing the linked international financial systems and stock markets to fall out one after the other, where most securities and stocks suffered great losses. Subsequently, uncertainties about the solvency of major bank and investment houses have been 22

surfaced, declines in credit availability have been faced, and damages to investors' confidence have been occurred (Financial Development Report 2008). More recently, Naude (2009) described the current financial turmoil as a major destruction of financial wealth and a great psychological shock to many investors. The same author also evaluated the effect of the crisis on developing countries; concluding that many developing country economies were not largely effected as a result of good growth, limited direct exposure, better policies and having learned the lesson during the 1998 Asian crisis.

2.3.3 Financial Crisis Impact on Investors' Behavior and Attitude

Simply-put, a financial crisis is a situation that occurs when the demand for money and finance surpasses the supply of money and available funds. Such situation has a huge impact, not only on the economy and financial assets, but also on the investors' performance and behavior. According to the investment strategist Brett Hammond (2009), the market participants and investors are tremendously traumatized by the current financial crisis, as no one has experienced the scope, magnitude, and rapidity of the current financial losses. He further explains that when their portfolios lose more than half of the value, it is completely understandable that investors' responses deviate from rational reaction and common practice. These deviations in investors' behavior during and after a financial market crash were the main focus of many researches and questionnaires done by Dr. Robert Shiller, the director of The Investor Behavior Project at Yale University. As part of the project, many investor attitude surveys and questionnaires have been continuously done since 1989. In one of his fundamental research papers, Shiller (2002) discussed his survey results and noted that during a financial crisis or market crash investors tend to have different responses to news and rumors in making decisions to sell or buy. He added that before the crash, many investors claimed they knew a market crash was likely to occur because they thought that the market was overvalued. Investors also thought that they could predict the market, stating that a rebound was to happen soon after, all based on "gut feeling" and "common sense". Such personal opinions and feelings are referred to as "Market Psychology". Shiller (2002) questioned the fact that if investors reacted to their market psychology, then one might question their part in causing the crash, or at least in worsening it. Other major feelings displayed by investors during market crash were intense anxiety and investor panic. During a market crash, the majority of market participants reveal a notable amount of anxiety and concern which play a major role in their selling and buying trades (Shiller 2002). More recently, 23

Barlevy and Veronesi (2003) argued that when a market crash occurs despite the absence of any market fundamental explanation, it is usually due to the behavior of worried investors who panic and cause the prices of stocks to 'free fall'. Based on similar findings, many investors have realized that in order to build wealth in unstable market conditions, one has to control emotions and avoid self-destructive investment behavior. Many statistical results show that at times like the financial crisis, the market movement can be unrelated to economic fundamentals, hence more investors and economists are recognizing the significance of behavioral finance and its role in the stock market (Shiller 2002). Agreeing with these results, Shefrin (2009) argued that the trigger of the current financial meltdown is investors' irrational and shocking behavior, which may be prevented if more acknowledgment had been given to the principles of behavioral finance. According to the author, such principals can equip the market with early-warning system to prevent or at least minimize the effect of market crashes and financial crises, mainly by being more psychologically-intelligent.

2.3.4 Empirical Researches about Financial Crisis Impact on Investors' Behavior

Many empirical researches about the financial crisis impact were based on the 90's Asian financial turmoil; these studies are used to understand the current global financial crisis. In 2004, Green has examined the impact of the 1997 Asian financial crisis on the Indonesian investors and he noted that the financial crash has as much impact on investors' behavior as it has on Investment projects and expenditures. He further elaborated on the shift of the investing behavior, stating that investors' confidence was extremely shaken to the point that some investors pulled out of the market, hence allowing private capital to exit the market. Such behavior would undoubtedly affect the economy of the country negatively, and would raise the question of how the financial crash has altered the business behavior, and the business as a whole. As an example, Green (2004) used the pre-crisis power of politically well-connected investors, which enabled them to get the best returns and was assumed a guaranteed gain rule in the pre-crisis corrupted system. However, this was not the case after the Asian financial crash, as the author explained that even the politically well-connected contractors and investors could no longer rely on such a rule to make investment decisions. Thus, the post-crisis changes in investment behavior based on social networks and political connections in Indonesia are evident and not to be ignored.

24

In the same way, another analysis of the Asian financial crisis and its impact on the behavioral finance was provided by Kamesaka and Wang. Their 2004 research paper, titled "The Asian Crisis and Investor Behavior in Thailand's Equity Market", discussed the pre-crisis and post-crisis behavior of both the foreign and domestic traders and investors with respect to the daily buying and selling flows. The authors highlighted the significant impact of investors' behavior in causing some financial instability, which can lead to further serious financial disturbance.
Figure 2.7: Accumulated Net Buying of Investors in Thailand (in Baht)

Source: Kamesaka and Wang (2004)

Based on their research findings, Kamesaka and Wang (2004) pointed out that the foreigner investors were the net buyers throughout the period, before, during and after the Asian crisis. They also added that on one hand, the foreign investors never withdrew from the market during the crisis, instead they increased their investment. On the other hand, the local traders operated in the opposite direction, as shown in Figure 2.7. Furthermore, the authors stated that during the financial crisis, foreigners make positive returns mainly by profiting from domestic investors' losses. This is due to the different behavior that the foreigner investors and domestic investors demonstrate. During the financial crisis, the foreigner investors tend to use relative information such as past returns and fundamental forecasts. However, domestic investors were found to be following the random market movement, buying the stock when price had fallen, hence increasing their investment losses as the stock price continues to fall. In addition, domestic investors have a lower appetite for risk exposures and associated risks. This is consistent with Kahneman's theory of reference points (1992), as cited by Lin et al. (2006), which explained how 25

investors compare their outcomes to assigned points that reflect their risk appetite. Furthermore, Kamesaka and Wang (2004) declared that the domestic investors' unwillingness to recognize their losses and underperformance is the main reason behind their bad-timing trades and random stock picks. These empirical researches, among many others, have been rich with cases and examples in which behavioral and psychological elements have a remarkable affect on investors' financial decisions and the entire economy as well. However, this research focuses on the Asian markets considering the fact that both Asian and Middle Eastern stock markets are developing markets in comparison with the U.S. and European stock exchanges.

2.4 KUWAIT ECONOMY OVERVIEW 2.4.1 Kuwait Economy Background

In its 2009 World Fact book, the Central Intelligence Agency (CIA) of USA described Kuwait as small rich country with reported crude oil-reserves of about 104 billion barrels, which accounts for 8% of world reserves. The CIA also added that despite the 1990 Iraqi invasion's attempts to destroy Kuwait's oil-fields and to endanger Kuwait's economy and stability, Kuwait has recovered and continues having a steady economic growth thanks to such oil reserves. It is an undeniable fact that Kuwait's economy is highly dependant on oil, as it accounts for around 50% of GDP, 80% of government revenues, and 95% of export revenues. However, while mainly relying on oil, Kuwait has one of the oldest and most stable banking and financial sectors, and stock exchanges in the Middle East region. The Central Bank of Kuwait (CBK) is responsible for supervising the local banking and registered financial sector units, through on-site inspection and off-site monitoring to ensure the implementation of sound professional banking/financial practices that conform to relevant international practices and policies. Kuwait is also a member of the Gulf Cooperation Council (GCC), the International Monetary Fund (IMF), the World Bank, the World Trade Organization (WTO), the Organization of Petroleum Exporting Countries (OPEC) and the Organization of Arab Petroleum Exporting Countries (OAPEC). (Central Bank of Kuwait Report 2008, Central Intelligence Agency of USA World Fact-Book 2009)

2.4.2 Kuwait Financial System

The Kuwaiti economy is highly dependent on oil and vulnerable to oil price fluctuations, however, the Kuwait financial system is considerable and well-developed. The financial sector is believed to be an 26

extremely important sector in the country as it represents a large fraction of the market capitalization, and is largely involved in most financial operation activities such as borrowing, lending, saving and investing. The financial system appears to be stable, sound, well-supervised and regulated by the Central Bank of Kuwait (CBK). The CBK has created a complete system for banking and financial regulation and supervision that conforms to international standards. It is to be pointed-out that the banking sector is the core of Kuwait financial system. Banks in Kuwait are liquid and well-capitalized which enable them to withstand any substantial shocks, although the sensitivity to shocks varies from bank to bank based on the dependence on equities and real estate markets. In general, Kuwait has a diversified financial system, which includes commercial banks, Islamic banks, Islamic finance houses, investment companies, financial advisories, brokerage firms, insurance companies, foreign money exchange dealers and Kuwait Stock Exchange market. International Monetary Fund Country Report 2004) (Central Bank of Kuwait reports and

2.4.3 Kuwait Stock Exchange

In October 1962, the official stock exchange of the state of Kuwait was established when the Royal 'Amiri' Decree was passed on to construct the Kuwait Stock Exchange (KSE). Though the Kuwait Stock Exchange is remarkably new in comparison with most stock exchanges in the world, it is undeniable that KSE is indeed one of the major, oldest, largest, and most active stock Exchanges in the Gulf and Middle East regions. Moreover, the Kuwait Stock Exchange provides a wide range of diverse and exclusive stocks, together with a number of market instruments, making it an attractive market for both domestic and foreign investors. The continuous efforts of KSE to enhance and develop its operations, regulations, and processes are dedicated to support and promote the interests of investors, members of businesses and industries, its employees, as well as the Kuwaiti government and the whole nation. (Kuwait Stock Exchange 2009, International Monetary Fund Country Report 2004) As registered in the second quarter of 2009, the Kuwait Stock Exchange has 205 listed companies in various sectors, including Banking, Investment, Real Estate, Insurance, Food, Industrial, Services, Industrial, Mutual funds, and Non-Kuwaiti companies. The main objective of Kuwait Stock Exchange is to be a one of the global top-rated stock exchange (Kamco Online Research 2009). As a relatively new stock market, KSE has been and still is going through many development and changes since its establishment. Table 2.1 provides a glimpse at the different stages that the KSE went through over time. 27

Table 2.1 - The Development of the Kuwait Equity Market

1952 1958 1962 1977 1982 1983 1983 1988 1992 1995 1998 2000 Kuwaiti citizens had their first experience in share trading First unofficial stock exchange transactions were carried out by brokerage offices in the market An Amiri Decree was passed to establish an official stock exchange for Kuwait in October. The first formal stock exchange, an over-the-counter market, was opened in April 1977 Stock Market Crash - Souk Al-Manakh Crisis, an unofficial over-the-counter stock market An Amiri Decree was passed to force investors to register all bid and offer prices The Stock Exchange was officially named the "Kuwait Stock Exchange" (KSE) Trading on KSE was opened to Gulf Countries Council (GCC) citizens The exchange reopened in September 1992 after its suspension due 1990 Iraqi invasion KSE introduced the automated trading Forward market was reintroduced In August, trading in KSE was opened to all foreigners

Source: Kamco Online Research 2009, International Monetary Fund Country Report 2004

Investors in Kuwait Stock Exchange are privileged to use various methods and valuation techniques which enable them to seize the market's existing opportunities and create new profitable chances. In addition, as in any other stock exchange, investors in Kuwait Stock Exchange depend on two critical elements when making their investment decisions, financial information and behavioral factors. These elements influence the investors' outlook towards the listed stocks in the market, which may lead to irrational and inefficient behavior. Therefore, the Kuwait Stock Exchange gives special attention to the transparency of any related financial information and market transactions that is made in the Kuwait Stock Exchange in order to minimize any rumors that can cause irrational investors' behavior and negatively impact the stock market or the economy. Despite the fact that the Kuwait Stock Exchange aggressively tries to rationalize the dealings and transactions that are made in the market, stock price fluctuations have continued to appear in the stock exchange. Such irregular trends create inefficiencies in the standard financial models and should not be overlooked or ignored. Therefore, KSE is still to give more emphasis on the behavioral aspects, importance of transparency and the power of information and media. For this reason, the Kuwaiti stock market relied on the major USA stock exchange NASDAQ to assist in the development of the Kuwaiti financial system (Financial Channel 2009). Upon signing the agreement in October 2009, Lars 28 Ottersgard, Senior Vice President NASDAQ OMX Market Technology has stated that:

"We look forward to partnering with KSE to support development of its financial market, and, as part of this, deliver a state-of-the-art system that will put them at the technology forefront among Middle East exchanges. Kuwait is a key financial center in the Middle East region and we are confident that our collaboration with KSE will act to further attract investor awareness both to the exchange and Kuwait's financial market as a whole." (Financial Channel 2009) With this step, Kuwait Stock Exchange aims to comply with the international standards and to minimize the markets' anomalies. It also plans to educate its investors and market participates in terms of understanding how news affect price changes, seasonal price changes, and important fundamental and technical analysis of the stock. All of these aspects will drastically influence the behavior and biases of active investors and their decisions.

2.5 RESEARCH CONCEPTUAL MODEL

As mentioned previously in this chapter and as agreed upon by many economists, the work of behavioral finance does not reject the essential work of traditional finance. In point of fact, the behavioral finance adds the investors' unpredicted and irrational behavior in the decision-making process to the work of traditional finance to make it more realistic. Furthermore, this research aims to discuss the behavioral finance and its effect in the financial markets. It examines how the behavioral biases can impact the investors' judgments and decisions. In addition, this research attempts to analyze the effect of the 2008 global financial turmoil on the investors' behavior and decisions, primarily in the State of Kuwait, aiming to outline and understand the various factors that lead to create and increase the impact of the crisis. To better understand the Kuwaiti investors' decision-making process, the research conceptual model uses the financial crisis impact as a filtering tool that re-organizes and re-weights all behavioral and financial factors as demonstrated in Figure 2.8.

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Figure 2.8: The Research Conceptual Model

Emotional Factors

Social Factors Cognitive Biases

Financial Crisis Impact

Personal Heuristics

Behavioral Factors

Investor's Perception & View

Investor's Decision

Asset-Based Valuation Income-Based Valuation Cash Flow-Based Valuation Market-Based Valuation

Financial
Factors

Source: Research Based (2009)

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CHAPTER THREE: RESEARCH DESIGN AND METHODOLOGY

3.1 INTRODUCTION
This chapter discusses the methodology and data collection framework for this research study. The chapter describes the research design, sampling methods and data collection, after stating the problem definition and the research objectives and questions. Furthermore, this chapter explains the research questionnaire and the data collections techniques.

3.2 PROBLEM STATEMENT

According to researches and financial institutions, the stock exchanges and financial markets are composed of rational investors and well-educated professionals making decisions that make up the true value of assets. These assumptions are limited to the classical and traditional financial theories. However, this is not the case, as there are competing theories which state that the market is also driven by irrational behavior of investors. This behavior is influenced by many factors including personal experience, emotional, and social factors. To better understand the financial market with all of its inefficiencies, analyzing the investors' behavior is very crucial, especially after being highlighted by the 2008 Global Financial Crisis. The problem, which is fully stated in section 1.3 of chapter 1, is Kuwaiti's financial system failure to realize the significance of investors' behavior impact on the stock market in various scenarios, whether positive or negative. There have been minimal efforts to analyze the investor's biases within the stock exchange in Kuwait, despite the fact that the majority of market participants are small and inexperienced individual investors.

3.3 RESEARCH OBJECTIVES

A better understanding of the investors' behavior and decision-making process within the Kuwait Stock Exchange is needed to get a deep insight of the market's trends and prices changes, which ultimately leads to a more efficient market. Therefore, the area of focus of this research study is Kuwait Stock Exchange and its investors in terms of different demonstrated behavior, before and after experiencing the current financial crisis. This research aims to gain an understanding of how investors' biases affect

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their decision-making process in Kuwait Stock Exchange. In order to do so, the following objectives have been specified: To identify the key factors which affect the individual investors in making their investment decisions in the Kuwait Stock Exchange prior the financial crisis. To make a reasonable comparison between the investors' actions and decisions before and after 2008 financial crisis in terms of behavioral and financial aspects. To assess the impact of the 2008 financial crisis on Kuwaiti investors' behavior and decisionmaking process. To explore the dependence of Kuwaiti investors on the various behavioral biases when making their equity-investment decisions, before and after the global financial crisis, in Kuwait Stock Exchange.

3.4 RESEARCH QUESTIONS

To meet and achieve the desired research objectives, the following questions are used to collect required data and to provide essential information and insights needed to complete this research study. 1. How significant is traditional financial analysis to individual investors when making their investment decision in Kuwait Stock Exchange? 2. How dependent are individual investors on their behavioral biases when making their investment decisions in Kuwait Stock Exchange? 3. Which aspect does the investors in KSE mostly rely on? Traditional Finance factors or Behavioral Finance elements? 4. How does the 2008 financial turmoil have impact investors' behavior and action in Kuwait Stock Exchange in terms of financial decisions and transactions? 5. How does the financial crisis affect the investors' dependence on behavioral biases in Kuwait Stock Exchange?

3.5 RESEARCH HYPOTHESES

According to Romeijn (2009), a hypothesis plays a significant role in science, especially in the behavioral and social sciences. It is a testable proposal about the relationship between two or more aspects or events. Using the assigned objectives and proposed questions, the hypotheses of this research study were derived as can be seen in the hypothetical model in Figure 3.1. 32

Figure 3.1: The Proposed Hypothetical Model H4

Emotional Factors Personal Heuristics Social Factors Cognitive Biases

H2

Financial Crisis Impact

Behavioral Factors

H5

Investor's Perception & View

H3
Asset-Based Valuation Income-Based Valuation Cash Flow-Based Valuation Market-Based Valuation

Investor's Decision

Financial Factors H1

Source: Research Based (2009)

Hypothesis #1: Individual investors in Kuwait Stock Exchange rely on traditional and fundamental financial tools when making their investment decision. Hypothesis #2: Individual investors in Kuwait Stock Exchange rely on various biases such as: their intuition, experience, and social network when making their investment decision. Hypothesis #3: Individual investors depend mostly on their own intuition and behavioral aspects rather than known financial tools when making their investment decision in Kuwait Stock Exchange. Hypothesis #4: The current financial turmoil has an impact on how investors behave and act in Kuwait Stock Exchange in terms of financial decisions and transactions. Hypothesis #5: The current financial crisis has increased the individual investor's dependence on behavioral aspects when making investment decisions in Kuwait Stock Exchange. 33

Hypothesis #6: The proposed research conceptual model used to test the influence of behavioral and financial variables on investors' decision-making process is valid, and considered a good fit model for both scenarios, before and after the financial crisis.

3.6 RESEARCH DESIGN 3.6.1 Research Approach

As commonly known, a research project involves the use of theory, which will raise a question concerning the design of the research. For this reason, the thesis shall clearly state the research approach and strategy to assist in the examination of research questions. According to Saunders et al. (2007), a researcher should understand his/her adopted research philosophy and use different research approaches. The authors explained that Research Philosophy is a term used for the development and nature of the knowledge applied in the thesis. In addition, the same authors discussed that the nature and type of the research topic and questions will determine the choice of desired Research Approach. In 2007, Overmars et al. stated that there are two approached when conducting a research project: the deductive approach, and the inductive approach. The first one applies a theoretical framework and real case studies to derive relations using detailed data. The authors explained that the Deductive Approach generally starts broadly with general theories and principals and narrows it to more specified observations and testable hypotheses. and examples towards theory development. On the contrary, the Inductive Approach, as discussed by the same authors, employs an open-ended framework, starting from specific observations In other words, deductive approach is a top-down approach, while inductive approach moves in the other way, from a specific detail to broader generalizations and theories, as shown in Figure 3.2. Figure 3.2: Research Approaches Deductive Approach "Top-down" Hypothesis Theory Inductive Approach Tentative Hypothesis Pattern Observation 34 "Bottom-up"

Observation Confirmation
Source: Adopted from Burney (2008)

In this research, the deductive approach is used, which is used to identify the relationship among various variables. It is considered the best choice because specific questions are asked to determine the factors that influence the investment decisions of the targeted individual investors. According to Burney (2008), deductive reasoning is better when narrowing the research to testable hypothesis due to the fact that pre-specified questions are used while inductive approach uses open-ended questions to build up a theory. In addition, the same author state that while inductive reasoning is process-oriented, deductive reasoning is outcome-oriented. Therefore, deductive approach is more suitable for this research study as it attempts to find out the final impact of the current financial crisis on the Kuwaitis investors' behavior within Kuwait Stock Exchange.

3.6.2 Research Purpose

Saunders et al. (2007) linked the research purpose to the way the research questions are formulated and asked. The authors explained that there are three common classifications of research purpose, which are mostly used in research method' literature: Exploratory, Descriptive, and Explanatory. An Exploratory Study, as defined by Polonsky and Waller (2005), is the research that focuses on a problem and sheds the light on a situation to explore and examine it thoroughly. It is mostly used to seek new information and to assess a situation in a particular way or a specific view. On the other hand, a Descriptive Study seeks to portray and describe the situation in terms of people, market conditions, and any other characteristics that the research is interested in (Robson 2002, as cited by Saunders et al. 2007). The descriptive research is often used when it is necessary to have a clear and a good picture of a certain event or trend in order to collect the desired data. As for the Explanatory Study, Saunders et al. (2007) stated that it is designed to establish and derive cause-and-effect relationships between the different variables of a situation. The authors also added that it is best fitted for researches that aim to test hypotheses and build theories.

3.6.3 Research Methodology

In their 2007 "Research Methods for Business Students" book, Saunders et al. explained that despite the fact that both are widely used business and management researches, there is a big difference between Quantitative and Qualitative research approaches. In one hand, the Quantitative Research is an approach that generates and uses numerical data, either with data collection techniques such as a questionnaire, or with data analysis procedures such as statistics. On the other hand, the same authors 35

stated that Qualitative Research is a term given to a research that generates and uses non-numerical data, such as interviews and data categorization. The fact that this research study aims to collect data from an acceptable number of individual investors in Kuwait Stock Exchange, it was clear that quantitative approach is the best method for the purpose of this study.

3.6.4 Time Horizons

According to Saunders et al. (2007), one of the major considerations when planning a research study is the time horizon needed to meet the assigned objectives. One of the most common time-horizon designs is Cross-Sectional; in which the research analyzes and examines a phenomenon at a particular time, or as the authors call it, "a snapshot". The other design is the Longitudinal Approach, which seeks to examine and measure change over a period of time. As cited by the authors, Adams and Schvaneveldt (1991) explained that longitudinal design is best used when the researcher aims to study change and development in people or events over time. As this thesis is evaluating and examining the "current" impact of financial crisis on Kuwaiti investors' behavior when trading within the stock exchange, it is logical that the cross-sectional is the best approach. Providing a snapshot of how investors react and behave after the financial turmoil is the goal of this research study.

3.7 DATA COLLECTION METHOD

As discussed previously, this research is of a deductive and quantitative nature. Therefore, the most suitable data collection technique is a well-built questionnaire that aims to identify the change in behavior of individual investors within Kuwait Stock Exchange, before and after the financial crisis. Due to the intangible nature of behavior and general feelings, the questionnaire was derived in a way that covers all aspects and theories discussed in the literature review chapter. The early draft of the questionnaire was given to five experimental individual investors in the local stock market in order to test the assigned statements/questions. To assure the accuracy of the collected data, it is extremely important to make the questionnaire easily understood and clear as intended. Based on the feedback of the experimental investors, the final questionnaire (see Appendix A) was adjusted 36

and prepared as the main tool for data collection. It was distributed during the first three weeks of January 2010. The questionnaire is divided into the following sections:

Section One: Investor Information This section identifies the investor's general information and basic investment experience. It includes the investor's age, educational background, investment experience, preference of investment period, reason of investing in Kuwait Stock Exchange, investment style and techniques. Section Two: Financial Crisis Impact on Investor Perception and Decision This section evaluates the investor's opinion about the elements and factors of traditional finance and behavioral finance, as well as the financial crisis influence on his/her perception and final decision. It is considered the main part of the questionnaire as it is represented by 8 categories which are composed of a total of 25 questions. The categories are: Emotional Factors, Personal Heuristics, Social Factors, Cognitive Biases, Asset Valuation, Income Valuation, Cash-Flow Valuation, and Market Valuation. In addition, a "1-to-5" Likert-type scale is used to in evaluate the level of importance as follows: 1 = Strongly Disagree 2 = Disagree 3 = Neutral 4 = Agree 5 = Strongly Agree

Section Three: The General Financial Crisis Impact on Investors This section is composed of 5 questions to identify the general financial crisis impact on investors and on their decisions and behavior. The same "1-to-5" Likert-type scale is used again to measure the desired impact.

Section Four: Investor's Decision This section measures the quality and accuracy of the investor's decision upon depending on the factors mentioned in the previous sections when buying/selling stocks in Kuwait Stock Exchange. It is composed of 3 questions and evaluated the investor's decision before and after the financial turmoil using the Likert-type scale.

Section Five: The Importance Weights of Financial Crisis Impact on Investor Decision This is the final part, which weights the investor's opinion about the elements and factors of traditional finance and behavioral finance before and after the 2008/2009 financial crisis. It is divided into two categories, one that weights the behavioral finance vs. traditional finance, while the other weights the

37

importance of the main elements of behavioral finance. A hundred points were allocated for each category to be distributed among the elements and aspects.

3.8 TARGET POPULATION AND SAMPLING METHOD

The targeted population for the area under study is Kuwaiti individual investors who trade in the local stock market. The questionnaire was addressed to investors who were investing in the period preceding the financial crisis, during and after, as the study aims to analyze their behavior throughout this period. As it is somewhat impossible to collect data from the entire targeted population, Saunders et al. (2007) pointed that deciding on a suitable sample size is crucial to assure the accuracy of the data being collected. According to the same authors, the required sample size for a population of 1,000 to 10,000 at 95 percent level of certainty is 278 to 370. Therefore, to better reflect the behavior of investors in KSE, the sample size chosen for this research study is 350. The questionnaire will be distributed to the targeted sample and only fully filled ones will be considered in this research study. The individual investors will be randomly selected in order to guarantee a better reflected picture. This thesis attempts to obtain information from various investors with different educational background, age group, investment experience, and most importantly with different reactions to market conditions. More details of the questionnaire and the feedback are discussed in Chapter 4. The authors did not only highlight the importance of the sample size, as they discussed the need for a high response rate is essential for a successful representation of the situation. They further explained that some non-response factors may include: refusal to respond, ineligibility to respond, and unable to contact. The most common reason for non-response reaction is the refusal to answer all the questions or the refusal to be part of the research. Neumann (2000), as cited by Saunders et al. (2007), suggested that estimating a response rate is important when conducting a research. Therefore, an estimation of 60% of the total sample size, 210, will be considered adequate to serve the purpose of this study.

3.9 DATA ANALYSIS

For data analysis purposes, the Social Package for Social Sciences (SPSS) version 17.0, and AMOS version 16.0 were used to enter the collected data and derive relationships among various variables. The data analysis begins with categorizing and evaluating the collected data after collecting the filled questionnaires. Furthermore, graphs are created and tables are made to present the findings and 38

analyzed data. Different statistical methods were utilized to generate a logical presentation of the data and findings such as Structural Equation Modeling (SEM), Factor Analysis, and more which will be discussed in Chapter 4. Figure 3.3 illustrates the framework that is used in this research study to help: a) meet the desired objectives and test proposed hypotheses, and b) draw conclusions and recommendations for the next chapters.

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CHAPTER FOUR: DATA ANALYSIS, FINDINGS, AND DISCUSSIONS

4.1 INTRODUCTION
This chapter discusses the empirical tests, analysis and their findings by presenting the overall behavior of Kuwaiti investors before and after the 2008 financial crisis. Furthermore, the chapter provides descriptive analysis of the respondent's profiles, followed by detailed analysis of the collected data and key results from the empirical tests. Figure 4.1 illustrates the framework that is used in this research study to help: a) meet the desired objectives and test proposed hypotheses, and b) draw conclusions and recommendations for the next chapter.

4.2 GENERAL INFORMATION ANALYSIS 4.2.1 Response Rate

As discussed in section 3.8 of chapter 3, the required sample size for a population of 1,000 to 10,000 at 95 percent level of certainty is 278 to 370. The chosen sample size for this research study is 350, in order to reflect the behavior of investors in KSE. Therefore, 350 questionnaires have been distributed to random individual investors who invested before, during and after the 2008 financial crisis. Initially, the collected questionnaires were 295 with an overall response rate of 84%. Yet, 54 questionnaires were eliminated due to incomplete sections and unbiased answers. This caused the final valid number of questionnaires to drop to 241, with a final response rate of 69% as presented in Table 4.1.
Table 4.1 Response Rate

Distributed Questionnaires 350

Received Questionnaires 295

Valid Questionnaires 241

Valid Response Rate 69%

4.2.2 Respondents' Profile Analysis

In this section, the general information of investors is analyzed to have a better understanding of the different backgrounds of the survey's participants. For instance, as illustrated in Figure 4.1, the majority of investors who participated in this research study are between the ages of 26-35 years, presenting 47% of the total sample. On the other hand, investors who are younger than 25 are the least presented 40

group. As for the educational background of the respondents, presented by Figure 4.2, bachelor degree holders covered the greater part of the sample, followed by Masters' holders and diplomas, with ratios of 62%, 33% and 5%, respectively.
Figure 4.1: Respondents' Age Group

Figure 4.2: Respondents' Educational Background

Furthermore, data analysis has shown that the majority of responses are categorized over 10 years of investment experience (34%), followed by 6-10 years (31%), 2-5 years (27%), and finally less than 2 years of experience (8%). Interestingly, the investment period analysis showed that a large number of 41

participants are long-term investors (48%), while the remaining participants are distributed among 4-6 months, 1-3 months, and less than a month, with 22%, 16%, and 14% respectively. According to Figure 4.3, most of the survey participants (31%) have entered the stock exchange due to their knowledge of market and stocks, as 29% of investors stated that investing in KSE is considered a good source of wealth. The remaining 22% of respondents claimed that ease of entering is the reason of investing in KSE, while only 18% declared that they mainly invest in the stock exchange because it is profession-related.
Figure 4.3: Respondents' Reason of Investing in Kuwait Stock Exchange

When analyzing the sample's investment style, it was found that 51% of participants follow a balanced investment style when trading in the Kuwait Stock Exchange, while active investors accounted for 44% of the sample. Generally, balanced investors are more rational and less aggressive than active investors. This is mainly due to the fact that balanced investors tend to take their time to gather needed information and to obtain more knowledge before buying and selling stocks, on the other hand, active investors tend to trade aggressively and dynamically in an attempt to seize all opportunities presented in the market. The remaining 5% of respondents are passive investors. Figure 4.4 shows the different sources of investment knowledge used when investing in Kuwait Stock Exchange. According to the figure and data analysis, the majority of Kuwaiti investors rely on their social connections and networks when investing with a percentage of 43 of the entire sample. The 42

second major source, presented by 38%, is the investors' experience gained by their unique and individual investment experiences. The remaining two sources are professional advisory, and research and analysis, with 10% and 9% respectively.
Figure 4.4: Respondents' Source of Investment Knowledge

4.2.3 Respondents' Profile Analysis vs. Decision-Making Process

In this section, the profile characteristics of investors are considered when analyzing the investors' decision-making process, in both cases: before and after the financial crisis. In order to do so, a chisquare tests and cross-tabulations were done to assess the significance of each factor in making the final investment decision in the proposed scenarios. Table 4.2 lists the values and significance of each factor according to the data analysis. It is important to state that the value of any factor is considered significant when (sig. < 0.05). For example, as shown in Table 4.2, age, education, experience, investment period, and source of knowledge have significance in affecting the decision-making process before and after the financial crisis, as the significance of these factors are all less than 0.05. However, the reason of investing in Kuwait Stock Exchange, and the investment of style has no significance in the decision-making prior to the financial crisis, yet their significance improved after the financial turmoil (significance became less than 0.05).

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Table 4.2 Investors' Profile vs. Decision-Making Process

4.3 CONCEPTUAL VARIABLES ANALYSIS 4.3.1 Reliability Test of Pre and Post Crisis Factors
The reliability of data and factors used in this research analysis are measured by Cronbach's alpha, which is a commonly used coefficient of reliability. Cronbach's alpha is calculated in this analysis to measure the reliability of the proposed behavioral and traditional factors used in the two assigned scenarios (28 factors for each before and after crisis scenarios), as well as the overall reliability of all 56 items combined. It is essential to mention that the more items used in the reliability test, the higher Cronbach's alpha would be, indicating a better reliability result. Hence, a reliability coefficient of .70 or higher is considered acceptable in most social science tests and researches. However, others argue that a reliability coefficient of 0.5 or higher is also considered a good indication of the model reliability (Nunnaly 1976). The coefficients values, which reflect the data reliability, are presented in Table 4.3. The values of Cronbach's alpha in the table indicate an acceptable and satisfactory reliability of the used data.
Table 4.3 Pre and Post Crisis Factors Reliability Test

Items Before Financial Crisis Factors (Pre) After Financial Crisis Factors (Post) All Factors Combined (Pre + Post)

Number of Items 28 28 56

Cronbach's Alpha 0.807 0.830 0.861

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As pre-crisis factors, post-crisis factors, and all before and after crisis combined have a reliability coefficient of 0.8 and above, it is clear that the reliability of factors used in each scenario is acceptable, as well as the overall factors used as a whole. However, for further reliability analysis, the pre-crisis, and post-crisis were broken down to behavioral and financial elements as shown in Table 4.4 and Table 4.5. The results of both tables confirm the reliability of the overall data used without the need to eliminate or exclude any variable.
Table 4.4 Pre-Crisis Factors Reliability Test

Table 4.5 Post-Crisis Factors Reliability Test

4.3.2 Descriptive Analysis of Pre and Post Crisis Factors

The aim of the descriptive analysis in this section is to determine the relative importance of the behavioral and traditional finance factors in making investment decisions. The relative importance (RI) was measured within each category before and after the financial crisis. This is followed by measuring 45

the RI for all categories combined for each of the market scenarios. In order to obtain the RI measure, the mean values of each factor was used in the formula ( X * (100 / 5)) to compute the relative importance in the proposed categories as well as the order of each factor within the categories. This is done by ranking the variables of each factor in an order as reflected by the investors' responses and feedback. Refer to Table 4.4 to view the RI and ranking of all pre- and post crisis factors of behavioral and traditional finance.
Table 4.6 The Relative Importance and Ranking of Factors before the Financial Crisis

As can be seen in Table 4.6 the financial crisis has affected the relative importance of all behavioral factors and changed the ranking of most of them. This is mainly due to the new assessment that most 46

investors do when being under an intense market situation. For example, within the emotional factor dimension, losses used to have the highest significance when making investment decisions prior the financial turmoil, however, its significance decreased placing its relative importance in the third rank while the significance of making profits increased to be ranked at the top after the crisis. In addition, the traditional finance factors generally maintained the same significance and same ranking expect for the Asset-Value elements. As within the asset-value dimension, the company's net worth was ranked at 1 before the market was hit by the global crisis, however, after the market crash the company's reputation scored the top rank and the company's net worth moved down to the second rank. To better view the financial crisis impact on the various factors of behavioral and traditional finance in the decision-making process, the RI of pre-crisis factors were measured separately, followed by the RI measures of the same factors after the crisis. Table 4.7 shows that before the crisis, most investors relied on behavioral aspects when selling and buying stocks in Kuwait Stock Exchange as the Behavioral Finance (BF) factors scored the top 4 ranks. However, after going through the global financial turmoil the relative importance of the factors shifted. The traditional finance elements scored the top 3 ranks and the 5th rank as well, indicating that investors started giving more significance and weight to the Traditional Finance (TF) factors.
Table 4.7 The Overall Relative Importance and Ranking of Factors

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Furthermore, Figure 4.7 demonstrates the changes in the relative importance before and after crisis of all factors in percentages. It can be noticed clearly that behavioral factors (BF) have decreased in RI values in comparison with their values prior crisis. On the contrary, the values of RI of traditional factors (TF) have increased significantly.
Figure 4.5: Relative Importance of Behavioral and Financial Elements (in %)

4.3.3 Correlation Analysis of Pre and Post Crisis Factors

Correlation analysis is used to examine the patterns of relationship among the selected variables with the aim of discovering the nature of their interdependence and their effect. Furthermore, the analysis used in this section is a technique based on a correlation matrix of the variables and factors involved in the research study. The "1-to-5" Likert-type scale used in the questionnaire to evaluate the level of importance was as follows: 1 = Strongly Disagree 2 = Disagree 3 = Neutral 3 = Neutral 4 = Agree 5 = Strongly Agree However, to have a better and a clear picture of the relationships and correlations among variables, the scale has been regrouped to: 1, 2 = Disagree 4, 5 = Agree. In addition, Table 4.6 shows the scale used to analyze the correlation strength and direction. Generally, -1 R 1, with the magnitude and the sign of the correlation between the tested variables, represent the strength and 48

direction of respectively. For the example, given a correlation value of 0.976 implies a strong positive correlation between the chosen variables.
Table 4.8 Correlation Strength and Direction Description

Table 4.9 Correlation among Pre-Crisis Factors

Table 4.9 demonstrates the correlation strength and direction among all related elements used in the decision making prior the financial crisis. Having all values between -1 and 1, and none has a value of zero, indicates that all factors have a correlation whether in positive and negative. To better understand the correlation analysis, the table was divided into 4 dimensions to view the strongest and weakest 49

correlation within each dimension. The dimensions are: (behavioral vs. behavioral), (financial vs. financial), (behavioral vs. financial) and finally (all factors vs. investment decision). Starting with the behavioral vs. behavioral matrix, the strongest correlation is between the cognitive biases and social factors (0.616), while the weakest correlation is between cognitive biases and emotional factors (0.54). Moving to the financial vs. financial matrix, the strongest correlation is noticed to be between assetsvalue and cash flow-value (0.867), on the other hand, the weakest correlation is 0.785 between assetsvalue and market-value. As for the behavioral vs. financial matrix, the strongest correlation is recorded between social factors and market value with a negative correlation of 0.581, while the weakest correlation is between personal biases and cash-flow value of a negative correlation of 0.063. Moving to the last assigned dimension of all factors vs. investment decision, the cognitive biases scored the highest correlation value among all factors, recording a correlation of 0.579 with the pre-crisis investment decision. The weakest correlation in the last matrix is between the cash flow-value and investment decision of 0.003. In the same way, Table 4.10 shows the correlation among the same factors, however, the relationship is re-measured for post-crisis evaluation. The Cognitive Biases remains to have a strong positive correlation with the Investment Decision with a rate of 0.723. Furthermore, all elements are correlated in various strength and directions, as can be seen in the table.
Table 4.10 Correlation among Post-Crisis Factors

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4.3.4 T-Test Analysis: Paired Sample of Pre and Post Crisis Factors
To further investigate the relationship between pre and post crisis sets of elements, the paired sample ttest is used. It is a statistical test that computes the difference between any two variables to see if there is any significance. Generally in t-tests, if the significance value is less than 0.05, there is a significant difference, and if the value is greater that 0.05 then there is no significance. In addition, the sign of the mean values indicates the nature of the relationship, if the sign is positive then the pre-crisis factor has the strongest effect in the paired-sample, while a negative sign means that the post-crisis factor have positively increased. Table 4.11 shows the means of the selected paired-sample. The significance values in the table indicate that all tested paired-samples are significantly related with values less that 0.05. In addition, some mean difference signs imply that pre-crisis factors have a stronger effect, such as: Personal Heuristics (PH), Social Factors (SF), Cognitive Biases (CB), and Investment Decision (ID). On the contrary, the negative mean difference indicate that the post-crisis factors have a stronger influence, which are: Emotional Factors (EF), Asset-Value (AV), Income-Value (IV), Cash flow-Value (CV), and Market-Value (MV). It can be noted that most behavioral factors play a significant role prior the financial crisis, however, the importance shifts to the financial factors after the crisis.

Table 4.11 Paired Sample T-Test among Pre and Post-Crisis Factors

4.3.5 Regression Analysis of Pre and Post Crisis Factors

In this section the regression analysis is employed to test the proposed hypotheses by focusing on and analyzing the relationship between a chosen dependent variable and one or more independent variables. Using regression analysis provides a logical explanation of how the value of the dependant variable 51

changes when any of the tested independent variables is changed, while the remaining variables remain unchanged. In other words, the regression analysis is a statistical test used to identify which of the independent variables is related to the dependent variable, and to understand the form and nature of such relationship.

4.3.5.1 Regression Analysis of Pre-Crisis Factors

In order to test the proposed hypotheses and understand the results of the regression analysis, the hypothetical model presented previously in Figure 3.1 will be broken down into each hypothetical part. The pre-crisis part will test the effect of behavioral finance factors and traditional finance elements separately. This is followed by a comparison between the role of behavioral and traditional finance factors on the final investment decision made by the selected investors. Figure 4.6 demonstrates the first three hypotheses.

As presented in Figure 4.6, regression analysis is used to test Hypothesis #1, followed by Hypothesis #2 and Hypothesis #3. The aim of testing these hypotheses is to determine the effect of the independent variables (behavioral and financial factors) on the assigned dependent variable (Pre-Crisis investor's decision), separately and combined.

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Hypothesis #1: Individual investors in Kuwait Stock Exchange rely on traditional and fundamental financial tools when making their investment decision. Starting with Hypothesis #1, the significance of the financial factors on pre-crisis decision-making process is tested using the statistical regression analysis. The inputs included all four financial factors, and the results are displayed in Table 4.10. Furthermore, and as can be seen in Table 4.11, all of the entered variables are being excluded when running the analysis due to lack of significance which had a value greater than 0.05. Hence, Hypothesis #1 is rejected.

Table 4.12 ANOVA: Pre-Crisis Financial Factors

Table 4.13 Regression Analysis: Pre-Crisis Financial Factors Removal

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Hypothesis #2: Individual investors in Kuwait Stock Exchange rely on various biases such as: their intuition, experience, and social network when making their investment decision. The next step is to test Hypothesis #2, which focuses on the influence of pre-crisis behavioral finance on the investors' final investment decision. According to the regression analysis findings in Table 4.14 and Table 4.15 behavioral factors have significance in affecting the investors' choices prior the financial turmoil. This information was mentioned previously in Table 4.7, which placed the behavioral factors in the top four ranks in their significance prior crisis. Adding to that, Table 4.9 classified the included four behavioral factors in "moderate-to-strong correlation" category when analyzing their impact on the pre-crisis decision.
Table 4.14 Model Summary of Pre-Crisis Behavioral Factors

Table 4.15 Beta Coefficients of Pre-Crisis Behavioral Factors

Moreover, Table 4.14 and Table 4.15 shows good R values and Beta coefficients of the model behavioral factors, these values present how much each variable contribute in explaining the dependent variable. For instance, the largest Beta coefficient is the cognitive biases with a value of 0.579, meaning that provides the largest contribution in explaining the model's dependent variable, the 54

investment decision. The cognitive biases element is followed by personal biases, and emotional factors in terms of contribution sizes, while the social factor is being excluded. In other words, individual investors in the Kuwait Stock Exchange depend on their various biases and behavior such as personal habits, past experience and memory, and their own knowledge, rather than their social network, when making their final investment decision. This is confirmed in Table 4.16, which shows that the three variables that have significance prior the financial turmoil are: cognitive biases, personal biases and emotional factors. Thus, Hypothesis #2 is accepted for these three variables, and rejected for social factors.
Table 4.16 ANOVA: Pre-Crisis Behavioral Factors

Hypothesis #3: Individual investors depend mostly on their own intuition and behavioral aspects rather than known financial tools when making their investment decision in Kuwait Stock Exchange. The last hypothesis in the pre-crisis period is Hypothesis #3, which tests the importance of the investors' behavior used in the decision-making process in comparison with the utilization of fundamental financial aspects. Again, regression analysis is used to examine whether the individuals investing in Kuwait Stock Exchange, before the financial crisis, depend mostly on behavioral factors (as proposed) or on financial factors. Table 4.17 provides the findings and outputs of the analysis.

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Table 4.17 ANOVA: Pre-Crisis Behavioral vs. Pre-Crisis Financial Factors

Table 4.18 Beta Coefficients of Pre-Crisis Behavioral vs. Pre-Crisis Financial Factors

As can be seen in Table 4.18, three of the behavioral factors have significance and high beta coefficients in the decision-making process prior the financial turmoil. On the other hand, only one financial factor has an influence on investors' decision when buying and selling stocks in Kuwait Stock 56

Exchange. The results is confirmed by Table 4.7 that placed pre-crisis behavioral factors in the top four spots, while the pre-crisis financial factors were ranked last, according to their overall significance and impact on investment decisions prior crisis. Furthermore, Table 4.9 that measures the correlations of the pre-crisis factors indicated that pre-crisis behavioral elements have moderate-to-strong correlations with the investors' decisions, while the pre-crisis financial variables have very weak-to weak correlations. All these findings supports the proposed hypothesis, therefore, Hypothesis #3 is accepted.

4.3.5.2 Regression Analysis of Post-Crisis Factors

With the first three hypotheses tested, the pre-crisis period is fully examined and analyzed as intended. To move forward with the analysis, the hypothetical model (Refer again to Figure 3.1) is re-designed to cover the newly added concept, the financial crisis. Figure 4.7 focuses on all the post-crisis behavioral and financial factors and their influence on the investor's decision after the financial turmoil.

In addition, Figure 4.7 will be used as a framework to test the last two hypotheses, Hypothesis #4 and Hypothesis #5, which aim to examine the impact of the 2008 financial crisis on the various variables used in the research model. Hypothesis #4: The current financial turmoil has an impact on how investors behave and act in Kuwait Stock Exchange in terms of financial decisions and transactions. 57

To test Hypothesis #4, the regression analysis is used for both post-crisis behavioral and financial elements to see whether there are any significant changes after the crisis. Starting with the financial crisis impact on behavioral factors, it can be seen in Table 4.19 and Table 4.20 that the significance and beta coefficients of the elements have shifted and changed, in comparison with results of pre-crisis period shown in Table 4.15 and 4.16. Prior the crisis, the three variables that contributed in the investor's final decision are: cognitive biases, personal biases, and emotional factors with excluding social factors. However, after the crisis, the social factor is now included as a significant variable, replacing the personal biases element. This result highlights the changes in behavioral finance caused by the crisis.
Table 4.19 Beta Coefficients of Post-Crisis Behavioral Factors

Table 4.20 ANOVA: Post-Crisis Behavioral Factors

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The financial crisis impact is also obvious when testing the financial variables. Before the crisis all of the factors were excluded by the regression analysis due to lack of significance (Refer to Table 4.12 and Table 4.13). Yet, Table 4.21 and Table 4.22 show that after the crisis, Asset-Based Valuation (AV) has significance on investors' decision with a beta coefficient of 0.183. Hence, the impact of financial crisis on the traditional finance factors is evident.
Table 4.21 Beta Coefficient of Post-Crisis Financial Factors

Table 4.22 ANOVA: Post-Crisis Financial Factors

The fact that the financial crisis has an impact on behavioral and financial factors is also noticeable in the paired-sample test discussed previously in section 4.3.4 of this chapter (Refer to Table 4.11). Furthermore, all outputs and findings of the used analysis support the fact that the 2008 financial turmoil has an evident impact on how investors behave and act when making investment decisions and transactions in Kuwait Stock Exchange. Therefore, Hypothesis #4 is accepted. Hypothesis #5: The current financial crisis has increased the individual investor's dependence on behavioral aspects when making investment decisions in Kuwait Stock Exchange in comparison to their dependence on financial elements. The analysis used to test Hypothesis #5 aims to prove that investors in Kuwait Stock Exchange mostly on their behavioral biases in making investment decisions after the market crash. According to Table 59

4.23, Table 4.24, and Table 4.25, the behavioral elements: cognitive biases, emotional factors and social factor have significance in influencing the decision making after the financial crisis, while all the financial factors were excluded along with the personal biases element. This shows that when using regression analysis for all factors after the crisis, the significance of elements will differ to the analysis done for the same factors prior to crisis. Referring back to Table 4.17 and Table 18, it can be noted that three behavioral elements have significance: cognitive biases, personal biases, and social factors, and only one financial factor: assets-value. After the crisis, the only included financial factor is being excluded, and the significance of behavioral elements still contributes to the largest part of the final investment decision. So, it is clear that after the crisis, individuals invest and act in Kuwait Stock Exchange with regards to their behavior, as all elements with significance are behavioral factors, after the other financial factors were being excluded including the asset-value factor. All these findings supports Hypothesis #5, hence, it is accepted.
Table 4.23 Beta Coefficients of Post-Crisis Behavioral vs. Post-Crisis Financial Factors

Table 4.24 ANOVA: Post-Crisis Behavioral Factors vs. Post-Crisis Financial Factors

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Table 4.25 Post-Crisis Behavioral Factors vs. Post-Crisis Financial Factors

4.3.6 Structural Equation Modeling SEM

In this section, SEM statistical techniques are used to examine and estimate the casual relationships in the research model, using various combinations of statistical data sets and assumptions. The aim of using such technique is to test the validity of the constructed variables presented in the model. In addition, structural equation modeling is a confirmatory tool that has to be applied correctly in order to test and confirm the fitness and validity of the proposed model, which makes it a very suitable tool for both theory development and theory testing. The results obtained from our model analysis helps provide a better picture of the factors affecting the concept under study and their relative importance and degree of effectiveness. After testing the previous proposed hypotheses, using SEM is an attempt to test the overall research model of the thesis, which includes the effect of all behavioral factors, financial factors and financial crisis on the investors' decision-making process in Kuwait Stock Exchange. At this point, the intention is to test Hypothesis #6 by establishing meaningful validation to the proposed model and all of its elements. Hypothesis #6: The proposed research conceptual model used to test the influence of behavioral and financial variables on investors' decision-making process is valid, and considered a good fit model for both scenarios, before and after the financial crisis.

4.3.6.1 Structural Equation Modeling Results of Pre-Crisis Factors

In order to test the proposed model and the interrelationships of its factors, the pre-crisis period is examined separately. For this purpose, AMOS, a structural equation modeling software, is used to 61

provide standard multivariate analysis methods. Figure 4.8 represents the research conceptual model with the measured effectiveness of the final investor's decision before the financial crisis. The measured interrelationships among the behavioral and financial elements are displayed in the figure to give a clear picture of the influence made by these elements on the general behavioral and financial dimensions respectively. Interestingly, it can be noted that prior the financial crisis, behavioral finance dimension (value = 1.00) has greater affect on the investment decision than does the traditional finance dimension (value 0.58). In addition, as can be seen in Figure 4.8, the linked relationship between the two dimensions of behavioral and financial factors has a value of 0.56, meaning it has strength of 0.56 with an opposite direction. In other words, as the affect of behavioral factors increases, the strength of financial factors decreases by 0.56.
Figure 4.8: The Pre-Crisis Conceptual Path Model Using Structural Equation Modeling

The findings obtained from AMOS analysis support the previous results of hypotheses testing and confirm the validity of the pre-crisis conceptual model. To better understand how AMOS confirmed the validity of our model, a fitness assessment is done and the fitness variables are discussed.

Model Fit Summary

After discussing the general significance of our model and its elements, the model results are examined to prove the validity and soundness of the data analysis and statistics. The model fit summary is a combination of different measures to assess whether our research model fits the data or not. Luckily, 62

all measures indicated that our data was indeed a very good fit for the proposed research model. The assessment measures used are discussed below to better understand how AMOS accomplished the "goodness of fit" test. Starting with regression analysis results displayed in Table 4.26, all of the hypothesized paths have significance and positive estimated weight.
Table 4.26 Pre-Crisis Regression Weights using AMOS

Model Chi-Square (CMIN) Model chi-square, or the discrepancy function, is a commonly used test fit. If the model is a good fit, the value of chi-square should not be significant. On the other hand, a significant value of chi-square implies an unfit model structure. In general, a value of chi-square less than the range of 2 to 5 indicates the goodness of fit, the smaller the value, the better. In our model analysis, as shown is Table 4.27, the value of chi-square for the pre-crisis model is 1.988, which is a satisfactory model fit.
Table 4.27 Chi-Square of Pre-Crisis Model

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Goodness-of-Fit Index (GFI) In general, the value of goodness-of-fit index (GFI) varies between 0-to-1. However, the value should be equal or greater than 0.90 in order to accept the proposed mode. Table 4.28 shows that our research model scored 0.972; hence our model is accepted and has a good fit.
Table 4.28 Goodness-of-Fit Index of Pre-Crisis Model

Comparative Fit Index (CFI) CFI, a comparative fit measure, compares the proposed model to the fit of the independence model. The value of CFI varies from 0 to 1. Generally, a value of 0.9 and above is considered an acceptable fit, and a value close to 1 is considered a very good fit. The value of CFI for our model is 0.991, as presented in Table 4.29, which indicates that our proposed model is a very good fit.
Table 4.29 Comparative Fit Index of Pre-Crisis Model

Root Mean Square Error of Approximation (RMSEA) RMSEA, a commonly used measure of fit, is also known as a discrepancy function. The model is considered to be a good fit if RMSEA is less than or equal to 0.05, and an adequate fit if the value is less than or equal to 0.08. A model with RMSEA value greater than 0.08 is to be rejected due to lack of close fit. Our model has RMSEA value of 0.064 indicating an adequate fit, as shown in Table 4.30.

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Table 4.30 Root Mean Square Error of Approximation of Pre-Crisis Model

The results of model fit summary and the fit measures discussed provide a strong validation for the proposed model for the pre-crisis period. This also means that there are significant relationships between the constructed elements and variables included in the model.

4.3.6.2 Structural Equation Modeling Results of Post-Crisis Factors

The second part of the proposed model is concerned with financial crisis newly-added concept. In this model, the pre-crisis model is re-edited to include the financial crisis and its impact on the final postcrisis investment decision, as can be seen in Figure 4.9.
Figure 4.9: The Post-Crisis Conceptual Path Model Using Structural Equation Modeling

In the model presented in Figure 4.9, the financial crisis element is included to measure its effects on post-crisis investment decision-making process of investors within Kuwait Stock Exchange. It can be noted that both pre-crisis decision and financial crisis impact are considered significant inputs to obtain the final decision.

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A model fit summary, using AMOS, has been done to test the validity of the model fitness for the period following the crisis. The results of the fit measures, which were discussed previously, are listed in Table 4.31. The provided findings confirm the validity and the goodness-of fit of the model data and its elements.
Table 4.31 Model Fit Summary of Post-Crisis Conceptual Model

After using AMOS to provide model fit summary of our proposed research model, it can be noted that the model is considered fit and valid for all assigned variables in both scenarios: before and after the financial crisis. The results indicate that there are significant relationships among the constructed elements used in the model. Hence, the model is a good fit model and Hypothesis #6 is accepted.

4.3.7 Investor's Views Analysis

In this section, the personal opinions and views of our targeted sample will be analyzed and discussed as a part of the overall analysis of our research study. The views and opinions were obtained by asking the investors direct questions that can be used as a general feedback. There are two parts of the questionnaire that are composed of direct and simple questions: Financial Crisis Impact, and Weighting Elements.

4.3.7.1 Investors' Views on Financial Crisis Impact

In addition to the supportive statistical analysis, the investors' feedback, when asked about the impact of the crisis on their behavior and decisions, confirm the fact that the crisis has indeed changed their biases and financial assessments (Figure 4.10).

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Figure 4.10: Investors' Views on the Financial Crisis Impact

As can be seen in the figure, the majority of individual investors agree that the financial crisis has changes their habits and investment ways, whether it is about being more cautious when investing or paying more attention to the source and quality of the received information. Despite the fact that 5% of investors deny the fact the crisis made them realize the importance of diversifying their investments, 91% confirm and agree with this fact. In general, the financial crisis has undeniable major impact on individual investors trading in Kuwait Stock Exchange and their investment behavior. This feedback from investors is consistent with the various statistical analyses used previously in this chapter.

4.3.7.2 Investors' Views on Behavioral and Financial Elements

Another aspect that was directly evaluated by the investors involved in the research study is the importance of the model's elements and their assigned weights. First, the participants were asked to state their opinion about the importance of the financial and behavioral elements before and after the financial crisis. Their opinions were displayed by allocating weighted points to each of the two aspects. This helps detect any change in the investors' views of the significance of the behavioral and financial aspects. The results are shown in Figure 4.11.

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Figure 4.11: Investors' Weights of Behavioral Factors vs. Financial Factors

The results in the figure indicate that prior the crisis, investors majorly relied on their behavioral biases with a weighted percentage of 80, while their dependence on the financial tools was 20%. After the crisis, their reliance on their behavioral aspects decreased to 60%, yet remains the first option when investing in Kuwait Stock Exchange, in comparison with 40% for the financial elements. After weighting behavioral factors vs. financial factors, the investors were asked to evaluate the importance of the elements within the behavioral dimension, namely: emotional factors, personal heuristics, social factors and cognitive biases. The research study aims to get a deep insight in this new field of behavioral finance within the Kuwaiti market; therefore, it attempts to involve the investors in reflecting their insights of the behavioral dimension. As shown in the Figure 4.11, investors believe that the most important element is their personal heuristics. This is evident when they weighted the factor 40% before the crisis and they increased it to 62% after the crisis. The second significant element prior crisis, based on the investors' views, is the social factors (37%), followed by emotional factors (19%), and cognitive biases (4%). After the crisis, the elements maintained their ranks, yet changed their weight. For instance, while the weights of personal heuristics and cognitive biases increased (62% and 6% respectively), the weights of social factors and emotional factors decreased (18% and 14% respectively). These results show that investors' views and opinions regarding their investment ways and transactions are in fact affected by the financial crisis and market crash, which supports the findings stated earlier in this chapter. 68

Figure 4.11: Investors' Weights of Behavioral Dimension's Elements

4.3.7.3 Investors' Overall Feedback

In this section, the average of investor's reactions towards the elements of behavioral finance and traditional finance is discussed. Figure 4.12 presents the averages of behavioral factors, before and after the crisis. The averages represent the most chosen answer in the used Likert Scale. For Example, according to the figure, the highest ranked elements before the crisis are cognitive biases (4.04), and personal heuristics (3.89). On the other hand, the lowest ranked elements are social factors and emotional factors with averages of 3.70 and 3.63 respectively. However, the averages change after the crisis, when emotional factors element scores the highest average (3.78), followed by personal heuristics (3.56), social factors (3.03), and cognitive biases (2.63). Furthermore, Figure 4.13 demonstrates the same concept for the weighted result of each element used in the traditional finance dimension.
Figure 4.12: Behavioral Elements Weighted Score

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Figure 4.13: Financial Elements Weighted Score

In addition, Figure 4.14 presents the results of average differences between the model's elements before and after the crisis. This gap helps realize the impact of the crisis on the included variables. A negative gap indicates a negative impact, while a positive gap is a positive change. According to the figure, the smallest gap is 0.15 which indicates that the emotional factors element is the least influenced by the financial turmoil. On the contrary, the largest gap is 1.41 which means that cognitive biases element is the most affected element when the market crashed. In general, it can be noticed despite the rate of impact on the elements, all factors have been impacted by the global financial crisis with no exception.
Figure 4.14: Differences in Weighted Scores before and after Crisis

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CHAPTER FIVE: CONCLUSIONS, RECOMMENDATIONS AND FUTURE RESEARCH

5.1 INTRODUCTION
This chapter presents the conclusions of the research study by integrating all findings, results and analysis from the previous chapters. The aim is to highlight the outcomes generated from the research objectives, theoretical and methodological framework, and data interpretation. This chapter also attempts to provide answers to the proposed research questions in order to draw the final conclusions of the study. Finally, recommendations and future research suggestions will be addressed at the end of this chapter.

5.2 CONCLUSIONS
In this research paper, behavioral finance elements and traditional finance tools were examined with regards to the 2008 global financial crisis impact on investors' decision within Kuwait Stock Exchange. Many behavioral finance studies were conducted through international stock markets; however, few were dedicated to new and developing markets, specifically those in the Middle East region. Recently, many economists and financial analysts have realized the contribution of behavioral finance in explaining the irrational stock market movements. In addition, most studies done locally in the Kuwaiti stock market have overlooked the behavioral finance and its influence on the local individual investors. Therefore, this research study attempts to explain the behavioral factors effect on the investors' decision-making process before and after the 2008 financial turmoil. In an attempt to gather the needed information and to obtain investors' feedback for this paper, a number of questions were asked. The questions were divided to cover three major concepts involved in this study: behavioral factors, financial factors and the financial crisis impact. The results and answers to the proposed questions are discussed in the next sections.

5.2.1 Pre-Crisis Behavioral and Financial Factors

As Kuwait Stock Exchange is considered a relatively new and developing stock market in comparison with other international markets, it is important to understand and explain how the general movements of stock prices are generated. There are three questions dedicated to understand the influence of behavioral elements vs. financial variables prior the global economical crisis. 71

The questions assigned for the pre-crisis period and their answers are as follows: 1. How significant is traditional financial analysis to individual investors when making their investment decision in Kuwait Stock Exchange? To answer the first question, relative importance tests, correlation analysis, and regression analysis have been used. The relative importance tests ranked the four financial factors at the bottom, while the correlation analysis showed that the weakest correlations were those between the financial factors and the final investment decision. Moreover, the regression analysis has excluded all financial factors from the test, indicating lack of their significance in influencing the investors within Kuwait Stock Exchange prior to the crisis. In other words, all findings and results agreed in one aspect, traditional financial tools are not very significant to individual investors when making decisions in Kuwait Stock Exchange. An explanation for such result is that Kuwait Stock Exchange is yet in its developing phases, and despite the fact that investors in KSE are privileged to use various valuation techniques (Kamco Research 2009), most investors do not have the satisfactory knowledge to utilize such systems and methods. Furthermore, these findings are consistent with the theoretical discussions provided by many researches. For example, Ritter (2003) criticized the idea of a rational market that is composed solely of rational investors and financial tools. He argued that there is no such rationality in the economical world. Agreeing with the same concept, Bondt (2004) stated that the traditional financial analysis became less credible due to its failure to justify many unexplained and unknown stock market events. All these arguments imply that the tools of traditional finance have lost their significance in recent times; hence validating our answer to question 1. 2. How dependent are individual investors on their behavioral biases when making their investment decisions in Kuwait Stock Exchange? The descriptive analysis used in this research study ranked the four behavioral factors in the top spots with regards to their relative importance towards the final pre-crisis investment decisions. These rankings are supported by the correlation analysis results which show a strong correlation between the behavioral factors and investors' decision-making process. In addition to that, the regression theory has confirmed the significance contribution of three behavioral variables: emotional factor, personal heuristics, and cognitive biases, yet excluded social factors. However, the overall indication of these analysis and interpretations is that investors in Kuwait Stock Exchange rely on their various behavioral biases and habits when deciding what stock transaction is best suitable to execute. This confirms the 72

investors' dependence on behavioral elements and answers question 2, which is similar to many results done in the field of behavioral finance. In 2007, Shefrin described the investors' biases as the tendency to make errors and irrational choices which are incorporated in the decision-making process. Previously, Ritter (2003) explained that investors usually develop heuristics that leads into certain biases that consequently become a major part of the investment decision-making process. In addition, Hall and Taylor (2002) argued that if the traditional economists start considering the investor behavior in the developing markets as a significant factor affecting the financial market, then market anomalies and volatility may be less in the future. All of these theoretical arguments highlight the major role played by behavioral variables in influencing investment decisions and stock market movements. 3. Which aspect does the investors in KSE mostly rely on? Traditional Finance factors or Behavioral Finance elements? As for question 3, a comparison between the behavioral elements and financial tools is done using various analysis techniques. The aim of this comparison is to detect which dimensions do investors mostly rely on: their behavior and habits, or the available financial variables. According to the theoretical background used in this paper, investors and market participants are not always logical or rational, and their financial decision is largely driven by their behavioral biases (Kim and Nofsinger 2007). According to the same authors, behavioral finance elements dominate cultural economies such as the Asian markets and Middle Eastern exchanges. Having that stated, and knowing that Kuwait is a cultural economy that consists of social networks; our research study expects that behavioral finance is the dominant dimension. This expectation is confirmed by the different analysis done to test that theory. Starting with the relative importance test, behavioral factors have higher relative importance than the financial factors, which indicates that the major contribution to the final decision is provided by investor's behavioral biases. Furthermore, the correlation analysis examined the relationship between the various behavioral and financial factors and the decision-making process. The results were found to support the correlation of the behavioral elements with high beta coefficients, while the correlation of financial elements scored lower values. Finally, the regression analysis is used to determine the general significance of each factor. The findings indicate that the four significant elements that influence the final pre-crisis investment decision consist of: three behavioral elements (cognitive biases, personal heuristics, and social factors) and one financial element (Assets-Value). Using these findings to answer question 3, it can be stated that investors in Kuwait Stock Exchange rely mostly on behavioral aspects rather than financial factors. 73

5.2.2 Post-Crisis Behavioral and Financial Factors

In this section, the financial crisis concept is added to determine its effect on investors' behavioral and financial factors, which consequently impact their investment decisions. The impact of the 2008 global financial crisis is evident throughout the world as losses were growing and assets values were significantly decreasing. This research study attempts to discover the relationship between the financial turmoil and investors' behavior and actions in Kuwait Stock Exchange. In order to do so, two questions were asked regarding this newly-added concept.

The questions assigned for the post-crisis period and their answers are as follows: 4. How does the 2008 financial turmoil have impact investors' behavior and action in Kuwait Stock Exchange in terms of financial decisions and transactions? Question 4 aims to discover the changes in market participants' behavior and action caused by the 2008 financial crisis. Our descriptive analysis shows that the financial crisis has caused the relative importance of behavioral elements to decrease while it increased the relative importance of the financial tools. In addition, the t-test paired sample was used to measure the difference between the pre-crisis vs. post-crisis significance of all behavioral and financial variables. The results show that despite that the strength and direction of change differ from one variable to another, it was evident that all elements have been impacted by the crisis. Furthermore, when asked directly about the influence of the economical crisis on their habits and actions, the majority of investors agreed and confirmed this fact, hence, providing the answer to question 4. Our answer is also consistent with the findings provided by Shiller (2002) which stated that during market crash investors tend to have different responses to information and news, and different reactions to their own old habits. Furthermore, Hammond (2009) argued that all market participants and investors are tremendously affected by the 2008 financial crisis. These theoretical arguments support our findings and answer for question 4. 5. How does the financial crisis affect the investors' dependence on behavioral biases in Kuwait Stock Exchange? The main focus of this research study is the behavioral finance with Kuwait Stock Exchange; therefore question 5 is dedicated to measure the impact of the financial crisis on the behavioral elements. To answer this question, the results of the regression analysis are used. It was noted that after the crisis, individuals invest and act in Kuwait Stock Exchange with regards to their behavior, as all elements 74

with significance are behavioral factors, while the entire financial dimension was excluded. This is similar to theoretical discussions provided by many researchers such as Shiller (2002) and Shefrin (2009). The authors agree that at times like the financial crisis, the market movement can be unrelated to economic fundamentals, and argue that that the trigger of the current financial meltdown is investors' irrational and shocking behavior. Therefore, the link between the financial crisis impact and the increased dependence on behavioral biases is clearly evident; thus answering question 5.

5.3 RECOMMENDATIONS
Kuwait Stock Exchange is yet in its beginning and developing phases, therefore, most market participants have minimal financial knowledge needed to make the best and most rational decisions. Such issue is to be communicated between the assigned investors and used brokerage firms and financial advisory services. The importance of this issue relies on the fact that small irrational and unknowledgeable investors make up the largest part of the Kuwaiti stock market, and the sum of their actions may affect the stock prices majorly. According to our research findings and results, irrational behaviors and psychological factors play a major role in the decision-making process. Therefore, a better understanding of the investors' behavior and decision-making process within the Kuwait Stock Exchange is needed to get a deep insight of the market's trends and prices changes, which ultimately leads to a more efficient market. For this purpose, more psychological researches and studies are to be done at an advanced level to fully understand the triggers of the various investors' behaviors within the stock market.

Due to the fact that behavioral biases reflect the market's information, rumors and general news, it is strongly recommended that the executive management of Kuwait Stock Exchange pays more attention to the transparency of companies' announcements and market news. As a consequence of doing so, the efficiency of Kuwait Stock Exchange shall improve and the exposure to irrelevant information and news will be minimized, and hopefully will be eliminated.

Behavioral factors dominate the investors' reactions, as shown in our findings and results, therefore it is suggested that professional financial advisories and brokerage firms prepare a 75

behavioral profile for each client and investor. This shall help in better understanding the aspects and triggers that influence the investors' attitudes and decision-making process, which assist the companies in managing the investment portfolios and market movements. In addition, this may help investors understand their own behavioral habits and methods, which ultimately leads to better decisions.

Investment companies and financial institutions can analyze the general market trends caused by biased and irrational investors in order to identify and seize profitable opportunities in Kuwait financial market.

In order to present investors with the knowledge needed to utilize the various systems and techniques provided by Kuwait Stock Exchange, it is highly recommended that the management in KSE arrange more intensive and advanced financial courses and trading trainings. This helps prepare more knowledgeable and rational investors, which creates a more efficient financial market in Kuwait.

5.4 FUTURE RESEARCH

This research study is limited to individual investors in Kuwait Stock Exchange. Future researches can include financial institutions and brokerage firms in order to realize the overall impact of behavioral finance within KSE. Future research can focus on behavioral biases according to the investors' gender. Our research selected the individual investors sample randomly, with no consideration of the gender. However, it would be interesting to measure the influence of behavioral factors on females vs. males when making decisions in Kuwait Stock Exchange.

Further studies can also measure the difference of behavioral biases of Kuwaiti investors in comparison with foreigner investors in the Kuwaiti stock market.

Other demographics and additional lifestyle characteristics can be used in future studies. These traits can affect the investors' biases and attitudes in the market, which consequently can influence the stock prices and market movements. 76

In this research study, the impact of the financial crisis was limited to the change it has done to existent behavioral and financial factors. For future studies, the financial crisis role in creating and generating new habits such as fear-trading and greed can be discussed and analyzed. Understanding and managing new generated and established behaviors in crises and market crashes can be significant in an attempt to minimize the damages and losses at such times.

Future investigation can focus on the triggers of behavioral biases in market participants when investing in Kuwait Stock Exchange. This paper discusses the biases and their influence on decisions, however, knowing the trigger of these behavioral habits can be used as a tool to make profits, minimize losses, and seize good market opportunities.

In this paper, the minimal significance of traditional financial tools was noticed. Future studies can investigate such results due to the importance of financial elements in creating a more efficient financial market.

This research study is limited to investors within Kuwait Stock Exchange. It would be interesting to compare results from Kuwait with results from other stock exchanges in the Gulf Cooperation Council (GCC). Since all of the GCC stock markets are relatively new, it can be useful to identify the most efficient market and to try to improve less efficient exchanges within the region.

As the data used in this research study is based on investor's evaluation of their reaction to losses and profits, as well as their knowledge and so on, it is better to include the element of denial in the interpretation of the data. In other words, future researches can measure the honestly level of investors when discussing their habits and behavior when investing in the market.

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REFRENCES

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81

APPENDICES

APPENDIXA

QUESTIONNAIRE
Financial Crisis Impact on Kuwaiti Investors' Behavior and Decision-Making Dear Participant, I am conducting a research study as an essential part of my MBA thesis requirement. The aim of this study is to assess investors' behavior impact on investment decision, before and after 2008/2009 financial crisis. Kindly take few minutes to fill in this questionnaire. It is composed of five sections. Your participation is highly appreciated, so thank you greatly for your input and time. Regards, Sabeeka A. Al-Qadeeri

Section 1: Investor Information This section identifies the investor's general information and basic investment experience. Kindly tick the appropriate check box.
1

Less than 25 years 36 45 years High School Bachelor Degree Less than 2 years 6 10 years Less than a month 4 6 months My knowledge of the market Ease of Entrance into KSE Active Investment Balanced Investment Research & Analysis Social Connections

2 4

26 35 years 46 and above Diploma Masters and above 2 5 years More than 10 years 1 3 months More than 6 months It's profession-related Good source of wealth Passive Investment

II 1

Age
3 1 2 4

II 2

Education Qualification
3 1 2 4

II 3

Years of Investment Experience

3 1 2 4

II 4

Investment Period Preference

3

II 5

Reason of Investing in Kuwait Stock Exchange Investment Style

1 3

2 4

II 6

2 4

Professional Advisory My own experience

II 7

When Investing, I mostly rely on

3

Kindly note that the scale legend used in the following questions are: 1 = Strongly Disagree 2 = Disagree 3 = Neutral 4 = Agree 5 = Strongly Agree

Section 2: Financial Crisis Impact on Investor Perception and Decision This section evaluates the investor's opinion about the elements and factors of traditional finance and behavioral finance, as well as the financial crisis influence on his/her perception and final decision.
Before Financial Crisis Strongly Disagree 1 EF 1 EF 2 EF 3 EF 4 EF 5 I have positive reactions when profits are made I have negative reactions when losses are made I regret not selling/ buying a certain stock I have difficulty selling a "winning stock" I have difficulty selling a "losing stock" 2 3 Strongly Agree 4 5 After Financial Crisis Strongly Disagree 1 2 3 Strongly Agree 4 5

PH 1

I rely on past memory/experience when making an investment decision I rely on selective new information when making and investment decision I make a balanced decision using both past memory/experience and selective information

PH 2 PH 3

SF 1

I depend on the decision of my social network when lacking relevant information I usually follow the "herd" or majority of investors when lacking relevant information I tend to make the most appropriate decision after observing other investors actions.

SF 2 SF 3

CB 1

I am confident about my knowledge and abilities when investing I am confident about the information and trading tips when investing I am able to control and influence the investment outcomes (profits and losses) I only depend on selective and limited informational sources when investing

CB 2

CB 3

CB 4

Before Financial Crisis Strongly Disagree 1 AV 1 I usually consider the company's net worth when buying/selling a stock 2 3 Strongly Agree 4 5

After Financial Crisis Strongly Disagree 1 2 3 Strongly Agree 4 5

AV 2 I usually consider the company's liquidity when buying/selling a stock AV 3 I usually consider the company's reputation when buying/selling a stock

IV 1

I usually consider the company's earnings when buying/selling a stock I usually consider the company's dividend distribution when buying/selling a stock

IV 2

CV 1

I usually consider the company's projected net worth when buying/selling a stock I usually consider the company's projected liquidity when buying/selling a stock I usually consider the company's projected market value when buying/selling a stock

CV 2 CV 3

MV 1

I usually consider the company's position among comparable companies when buying/selling a stock

I usually consider the company's value among MV 2 comparable companies when buying/selling a stock

Section 3: The General Financial Crisis Impact on Investors This section identifies the general financial crisis impact on investors and on their decisions and behavior.
Strongly Disagree 1 FC 1 FC 2 FC 3 FC 4 The financial crisis made me more cautious with the way I invest my money in the Kuwait Stock Exchange The financial crisis made me realize the importance of diversifying my investments (i.e. in different sectors in KSE or in other industries like the real estate) The financial crisis affected my investment decision and behavior The financial crisis made me focus on the source/quality of information before making any investment decisions 2 3 Strongly Agree 4 5

Section 4: Investor's Decision This section measures the quality and accuracy of the investor's decision upon depending on the factors mentioned in the previous sections when buying/selling stocks in Kuwait Stock Exchange.
Before Financial Crisis Strongly Disagree 1 ID 1 ID 2 ID 3 I am generally confident with my final decision The outcomes of my decisions usually meet my expectations I am sure about my decisions because I made more profits than losses in KSE 2 3 Strongly Agree 4 5 After Financial Crisis Strongly Disagree 1 2 3 Strongly Agree 4 5

Section 5: The Importance Weights of Financial Crisis Impact on Investor Perception and Decision This section weights the investor's opinion about the elements and factors of traditional finance and behavioral finance before and after the 2008/2009 financial crisis. Listed below are the two main aspects used when making an investment decision of buying/selling a stock. The research would like to know how important these aspects are to the investor when making his/her final investment decision. Please allocate 100 points among the two aspects according to how important is it to you. Make sure that the final points add up to 100. Main Aspects
W1 When buying/selling a stock, I mostly rely on my feeling, my social connections, my experience, my own judgment, and/or the market overall reaction When buying/selling a stock, I mostly rely on market research, financial analysis, different stock valuation methods and/or the company's overall financial net worth

Before Financial Crisis

After Financial Crisis

W2

TOTAL

100

100

Listed below are the main elements of behavioral finance, which are used and/or demonstrated when making an investment decision of buying/selling a stock. Please allocate 100 points among the four elements according to how important is it to you. Make sure that the points add up to 100. Main Aspects
BW 1 BW 2

Before Financial Crisis

After Financial Crisis

When buying/selling a stock, I mostly rely on my emotions, intuition, and/or my feelings toward a certain stock When buying/selling a stock, I mostly rely on my previous experience and selective informational sources When buying/selling a stock, I mostly rely on recommendations from my social connections and friends, and on the reaction of general investors When buying/selling a stock, I mostly rely on my abilities to influence the market and move the prices to my benefit

BW 3

BW 4

TOTAL

100

100

Thank you for participating in my MBA Questionnaire. Have a great day!

BIOGRAPHY

Sabeeka A. Al-Qadeeri has an Engineering Bachelor Degree from University of Miami. Being fascinated with the business world, she started her career in an investment company after her graduation. She has then joined the banking sector and enrolled in a one-year UK-program of Credit Management (CCM) provided by Kuwait Institute of Banking Studies. During the year 2008, Sabeeka managed to follow up with both of her MBA studies and CCM courses. She has been ranked #1 in CCM among more than 60 participants from different banks in Kuwait (Refer to listed websites below). She was assigned as an Investment Manager in Burgan Bank, and then shifted her career to become an Investment Risk Manager in Al Ahli Bank of Kuwait. As an ambitious person, Sabeeka plans to continue nurturing her knowledge and experience with the aim of succeeding and excelling in her career and life.
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