Revista Argentina de Clínica Psicológica 2020, Vol. XXIX, N°1, 328-333 328 DOI: 10.24205/03276716.2020.44

APPLICATION OF CROWD THOUGHT AND BEHAVIOR IN ECONOMIC INVESTMENT

Weida Zhang*

Abstract The human and behavior have a nonnegligible impact on the economic investment process. This paper mainly investigates the impacts of crowd thought and herd behavior on economic investment. First, it is assumed that the investors with herd behavior have a lower return than those without that behavior. Then, several surveys were carried out on the mentality, behavior and returns of Chinese investors. The results show that the investors with herd behavior do not necessarily have a poor return, falsifying the hypothesis; slight herd behavior leads to greater return on investment, but blind herd behavior only suppresses the return; the herd behavior is rooted in investors’ uncertainty about . The research results help to improve the economic investment and investors’ psychology. Key words: Economic Investment, Mental Feelings, Crowd Thought, Herd Behavior, Return Rate. Received: 20-02-19 | Accepted: 18-08-19

INTRODUCTION occur, so do the non-investment behaviors. It is Traditional builds on the therefore impossible for investors to achieve the return as they have expected (Akhobadze, hypothesis of rational man. Driven by society Zumburidze, & Kurtskalia, 2016). The crowd and influenced by different psychology mentality is just the irrational psychology that conditions, rational man makes rational strategies. However, there are precious few investors present in economic investment, and influenced by it, they often respond to irrational rational creatures in the real world (Konana & behaviors such as blind investment and vicious Balasubramanian, 2005). It is found according to a lot of psychological studies, various states in increase of capitals (Koc, Kazantzis, Nuttall et al., 2013). people’s mind will exert an influence on decision Economically, herd behavior is also a typical behaviors. Driven by the psychological factors, irrational behavior. The phenomenon that economic people can't reach rational expectations. As far as the return on economic investment is investment follows the trend is prevalent in the financial market, that is, people will follow suit with concerned, irrational investment should not be others when they make the investment decisions ignored (Patterson & Daigler, 2014; Hal, 2015). ń ń As human thought holds, economic investment (Igli ski, Buczkowski, Igli ska et al., 2012). Investors activities can maximize revenues. However, are prone to crowd or herd behaviors to follow suit with others’ decisions, or fail to analyze their own subject to the factors, such as personal symmetric information and depend more on conditions, backgrounds of decision makers and external environments, psychological bias will individual behaviors generated by public opinion. Agglomeration will also result from learning and

imitation among investors (Metaxas, 2010; Miyasaka, Hebei University, Baoding 071002, China. Dobashi-Okuyama, Takahashi et al., 2017). Currently, E-Mail: [email protected] crowd thought and herd behavior as decision models of doers in the economic investment market

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WEIDA ZHANG 329 generate the mechanism and real manifestations thought and herd behavior can make investors which hit the focus of study in academic circles. become losers in the investment process due to lack There are few studies on how investment efficiency of cognition and subject to internal and external and economic value are subject to these two factors, and worse, they will be driven to psychological behaviors (Bucci, 2014). Based on the unconsciously violate normal investment theory psychological activities such as crowd thought and (Schneiderman, 2010). Besides, as the profiteering herd behavior, this paper conducts an empirical test industries will greatly expand the information to to discuss the above issue. attract investors, blind behaviors will lead to PERFORMANCE STATUS OF ECONOMIC excessive investments or overcapacity, which in turn INVESTMENT PROCESS reduces the investor's returns, and ultimately lose As China has made great strides toward the chance to achieve desired economic effect due to crowd mentality or herd behavior (Seiler, Lane, & economy in various industries, the momentum of Harrison, 2014). economic investment expansion has been increasing. In addition to the company's inhouse inputs, The idea of investment behaviors is shown in Figure 2. The investor's crowd mentality and herd individual investment is also a growing trend. behavior matter the investor's values, capabilities However, there are also increasing phenomenon of and the gradient theory of the investment project. crowd investment and herd behaviors, especially in the process of investment in business economy. From the last perspective, crowd thought and herd behavior will aggravate chaotic state in the (Cozzi & Giordani, 2011; Zhang, Shi, Wang et al., investment areas, impede industrial development, 2018). As shown in Figure 1, investors’ psychological factors have an influence on economic return. and waste the resources. That is to say, economic investment should be diversified and multi- Investors’ psychological effects respond to their dimensional, no crowd or herd behavior is allowed behaviors. In turn, investment return will cause to occur (Butt, 2015). psychological changes in investors. Blind crowd

Figure 1. The impact of investor psychology on economic return

Investor External Investor Investor Economic factors psychology behavior returns

Figure 2. Investment behavior thought

Nature of investment

Principal-agent theory

Investor values, thought and capabilities herd behavior theory

Investor echelon Investor behavior theory

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APPLICATION OF CROWD THOUGHT AND HERD BEHAVIOR IN ECONOMIC INVESTMENT 330

FIELD SURVEY ON ECONOMIC INVESTMENT BASED ON CROWD THOUGHT Figure 5 shows the attitudes of investors towards Hypothesis investment behaviors caused by media public opinion. It is obvious that the vast majority of In the fiercely competitive market, more and economic investment processes will be subjected to more investors follow the so-called "policy media public opinion, which is also a typical herd authority", which in turn lead to crowd behavior. They depend heavily on and more comply with thought. The herd behavior will lead to vicious authoritative information. In particular, when they competition in capital chain. Assume that the are in a puzzle about the market, there are more opportunities for crowd phenomenon to appear. We investors with the herd investment behavior has a plot a distribution map for investors’ attitudes lower return than those who do not follow herd behavior, that is to say, the herd investment towards whether the investment information is behavior is negatively correlated to the return on the sound, as shown in Figure 3. More than 75% of investors believe that the investment. investment information in the investment process is not healthy. Then, as shown in Figure 4, whether crowd thought may appear in the investors if the Figure 5. Distribution of investors' attitudes investment information is not sound. There are still toward herd investment due to media 62.63% of investors who choose economic opinion investments regardless of unsound investment information, which implies that herd behavior and 17.31% thought are critical.

4.81% Figure 3. Distribution of investors' attitudes Yes toward the soundness of investment Most of the time is yes information Most of the time is no 57.69% 11.54% No Don't konw 8.65% 75.2%

Positive survey on the influence of investors' 9.07% herd behavior on economic value 1.61% Figure 6 illustrates the cause for investors' crowd 14.11% behavior. The vast majority of investors still expect Investment information sound to reap a high return. In fact, they reduce the risk of Investment information is not sound enough taking a bath. Few investors will choose crowd Insufficient investment is not sound Don't know mentality for such reasons that they want to save trouble or don't have the confidence to invest in

some things. Ultimately, it is said that the

investment behavior has direct concern with Figure 4. Whether the investor's incomplete interests. The economic investment market is a investment information will lead to herd . Crowd behavior is only a single investment behavior factor that influences the investment behavior. This paper attempts to use the crowd probability to characterize this behavior. Assume the crowd 15.15% probability satisfies the normal distribution, and the 62.63% mean of crowd probabilities takes 0.2, 0.4, 0.6 and Yes Most of the time is yes 0.8, respectively. In the initial state of the simulation Most of the time is no 7.07% No test, all investors hold equal funds, and the total 4.04% Don't konw number of tests is 100. 11.11%

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Figure 6. Reasons for investor's herd behavior As shown in Figure 7, the mean of investor's crowd probabilities has an influence on the mean and standard deviation of the return on investment. 35.63% The mean return on investment (Figure 7(a)) first increases and then decreases at a rate greater than increasing with the increase of the mean of the crowd probabilities. When the mean of crowd probabilities is 0.4, the mean return on investment 9.2% is the maximum; the standard deviation of the 3.45% return on investment (Figure 7(b)) changes with a 45.98% 5.75% same law as its mean does, but the latter takes the maximum when the mean of crowd probabilities Save trouble Expect a good rate of return reaches 0.6. Reduce the risk of investment failure As shown in Figure 8, the mean of investor's No confidence in your investment Other crowd probabilities has an influence on the headcounts of winners and losers. It is obvious that

when the mean of crowd probabilities is lower, the Figure 7. The effect of the mean of investor ratio of winners to losers goes up; when the mean of conformity probability on the mean and crowd probabilities is equal to 0.4, this ratio reaches standard deviation of investment return the maximum; when the mean of crowd rate probabilities is greater than 0.4, the winners will decrease and the losers increase with the increase 0.004 of this mean value; the analysis of the economic value changes subject to the investor's crowd thought and behavior shows that a slight crowd 0.003 behavior will lead to a greater return on investment, but blind crowd behavior will cause a decrease in the 0.002 return on investment, resulting in an increase in the number of losers. 0.001 Figure 8. The influence of the probability of

Average return on return investment Average 0.000 investor's herd probability on the proportion of profit and loss

-0.001 0.2 0.4 0.6 0.8 1.6 Conformity probability mean (a) Mean return on investment 1.4 4

1.2

3

1.0 Proportionratio of profit-loss 0.8 2

0.6 0.2 0.4 0.6 0.8

Conformity probability mean Standard deviation of deviation Standard on return investment/10^-4 1 0.2 0.4 0.6 0.8 Conformity probability mean (b) Standard deviation of return on investment

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APPLICATION OF CROWD THOUGHT AND HERD BEHAVIOR IN ECONOMIC INVESTMENT 332

POSITIVE SURVEY ON ECONOMIC INVESTMENT analysis of herd behaviors, the individuals follow suit PROCESS BASED ON HERD BEHAVIOR with the way in which others adopt for similar things, Herd behavior theory model in consideration of the unobservability of the manager's investment psychology. As shown in Herd behavior is generally caused by information Figure 9, analyzing the economic investment degree stream. It can be used to describe heaps of in herd behavior, we can learn that the mean and the assimilated investment decision behaviors that occur in the economic investment process. In the median of herd behavior bias in the manufacturing, construction and real estate industries are lower. It process, the herd behavior is attributed to investors' means there is the convergence for economic uncertainty about information. Even in today's information age, investors cannot make sure that investment among these industries, and may be the information available is accurate. In the era subject to the national policy. Table 2 gives the descriptive statistics of each variable. The median of when the information is not concerned, people's herd behavior investment deviation is 0.150, which investment behaviors will prefer crowd behaviors. In the information age, investors will not analyze the shows that the convergence of economic investments in various industries is prevalent. available information independently, resulting in a decrease in the validity of portfolio investment. There are deliberate and false herd behaviors in the Figure 9. Analysis of investment degree of economic investment. Some investors will use economic investment in herd behavior others’ behaviors as the standards of their own actions, and some will follow suit after they make Median Mean velue Standard deviation 2.0 7 35 the same views about the information they hold. 6 30 1.5 25 Positive survey on how investors' herd behavior 5 20 influences economic value 4

1.0 15

Herd behavior matters the information behavior. 3 This paper analyzes the behaviors of 625 investors, 10 2 all of which come from listed companies. The sample 0.5 5 1 industries, as shown in Table 1, involve agriculture 0 and forestry, mining, manufacturing, construction, 0.0 0 -5 A B C D E F G H and transportation, information technology, real Industry code estate and general works. As learned from the

Table 1. Sample industry distribution table

Industry Industry code Sample size Percentage/% Agroforestry A 22 3.25% Mining industry B 39 6.24% Manufacturing industry C 268 42.88% Construction industry D 36 5.76% Transportation industry E 55 8.80% Information technology F 49 7.84% Real estate G 101 16.16% Comprehensive class H 55 8.80% Total 625 100%

Table 2. Descriptive statistics of variables

Variable Mean value Median Standard deviation Maximum value Minimum value Enterprise value 2.006 1.748 1.443 7.786 0.807 Investment herd behavior deviation 0.184 0.150 0.857 15.866 0.091 Profitability 0.144 0.139 0.901 3.812 -7.152 Capital capability 0.695 0.710 0.479 2.788 0.098 Scale of economic investment 23.652 23.515 1.514 28.496 13.166 Free cash flow 0.481 0.116 0.183 0.921 -0.407

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CONCLUSION Igliń ski, B., Buczkowski, R., Igliń ska, A., Cichosz, M., Piechota, G., & Kujawski, W. (2012). Agricultural Based on the two psychological activities, i.e. crowd thought and herd behavior, this paper biogas plants in poland: Investmet process, economical and environmental aspects, biogas conducts a test on how the economic investment potential. Renewable and Sustainable Energy process is subjected to the two. Here come specific Reviews, 16(7), 468–477. conclusions: (1) The behaviors of investors are vulnerable to Koc, R., Kazantzis, N. K., Nuttall, W. J., & Ma, Y. H. (2013). An economic evaluation framework for the psychological effects, and investment returns membrane reactor modules in the presence of will in turn cause changes in investor psychology. The survey shows that 62.63% of investors choose uncertainty: The case for process safety the economic investment under the condition that investment and risk reduction. Journal of Loss Prevention in the Process Industries, 26(3), 468- there is unsound investment information, which 477. reflects prevalent herd behavior and thought. (2) Slight herd behavior will lead to greater Konana, P., & Balasubramanian, S. (2005). The social–economic–psychological model of return on investment, but blind herd behavior will technology adoption and usage: An application cause a decrease in the return on investment, to online investing. Decision Support Systems, resulting in an increase in the number of losers who are engaged to economic investment. 39(3), 505-524. Metaxas, T. (2010). Place , place branding (3) The herd behavior is rooted in investors' and foreign direct investments: Defining their uncertainty about information. It is also found by the analysis of the investment processes in various relationship in the frame of local economic development process. Place Branding and Public industries that the investment convergence is Diplomacy, 6(3), 228-243. prevalent in various industries, represented by Miyasaka, T., Dobashi-Okuyama, K., Takahashi, T., manufacturing, construction and real estate industries. Takayanagi, M., & Ohno, I. (2017). The interplay between neuroendocrine activity and psychological stress-induced exacerbation of allergic asthma. Allergology International, 67(1), REFERENCES 32-42. Akhobadze, M., Zumburidze, O., & Kurtskalia, E. Patterson, F. M., & Daigler, R. T. (2014). The (2016). Analysis of spatial economic processes abnormal psychology of investment for defining investment policy. Journal of performance. Review of , Mathematical Sciences, 218(6), 703-708. 23(2), 55-63. Bucci, A. (2014). Population, innovation, Schneiderman, D. (2010). Investing in democracy? competition and growth with and without political process and international investment human capital investment. International Review law. University of Toronto Law Journal, 60(4), of Economics, 61(1), 61-84. 909-940. Butt, B. (2015). Herding by mobile phone: Seiler, M. J., Lane, M. A., & Harrison, D. M. (2014). technology, social networks and the Mimetic herding behavior and the decision to “transformation” of pastoral herding in east strategically default. The Journal of Real Estate Africa. Human Ecology, 43(1), 1-14. Finance and Economics, 49(4), 621-653. Cozzi, G., & Giordani, P. E. (2011). Ambiguity attitude, Zhang, R., Shi, G., Wang, Y., Zhao, S., Ahmad, S., & R&D investments and economic growth. Journal Zhang, X., & Deng, Q. C. (2018). Social impact of Evolutionary Economics, 21(2), 303-319. assessment of investment activities in the china– Hal, G. V. (2015). The true cost of the economic crisis pakistan economic corridor. Impact Assessment on psychological well-being: A review. European and Project Appraisal, 36(4), 331-347. Journal of Public Health, 8, 17-25.

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