THE IMPACT OF WARNING SIGNALS ON INDIVIDUAL INVESTORS' TRADING BEHAVIOR EMPIRICAL EVIDENCE: A RANDOMIZED EXPERIMENT Aantal woorden: 18.770 words Ewout De Brauwer Sarah Goemaere Stamnummer: 01502737 Stamnummer: 01407713 Promotor: Prof. Dr. Koen Inghelbrecht Commissaris: Dhr. Nicolas Dierick Masterproef voorgedragen tot het bekomen van de graad van: Master in de handelswetenschappen: finance en risicomanagement Academiejaar: 2018-2019 Deze pagina is niet beschikbaar omdat ze persoonsgegevens bevat. Universiteitsbibliotheek Gent, 2021. This page is not available because it contains personal information. Ghent Universit , Librar , 2021. Summary in Dutch Deze masterthesis heeft getracht te onderzoeken wat de impact is van waarschuwingssignalen op het handelsgedrag van individuele investeerders. Naar aanleiding van de financiële crisis in 2007-2009, werd de MiFID-wetgeving aanzienlijk verstrengd ter bescherming van de particuliere, vaak onwetende, investeerder. Beursvennootschappen of andere financiële tussenpersonen die beleggingsdiensten, zijnde vermogensbeheer en beleggingsadvies, aanbieden aan ‘retail investors’ zijn rechtswege verplicht een waarschuwingssignaal in de vorm van een negatief, neutraal of positief advies te verstrekken bij elke aankoop- en verkooptransactie die de cliënt wenst te verrichten (European Parliament; The Council, 2014). Hiervoor werd een experiment uiteengezet die een virtuele, financiële omgeving creëerde waar participanten investeringsbeslissingen konden nemen doorheen verschillende handelsperiodes. Participanten werden willekeurig opgedeeld in een controle-of behandelingsgroep om zo de impact van waarschuwingssignalen te kunnen meten. Handelsgedrag werd geregistreerd door middel van het aantal transacties, de handelsfrequentie, de proportie aangehouden in risicovolle en risicoloze activa (en het resterende gedeelte aangehouden in cash). Daarnaast werd ook gekeken naar de impact van waarschuwingssignalen op ‘overconfident’ (of overmoedig) handelsgedrag. De eerste testresultaten (preliminary tests) tonen aan dat waarschuwingssignalen een significante impact hebben op het handelsgedrag van individuele investeerders. De empirische analyses bevestigen deze resultaten en voegen eraan toe dat de impact voornamelijk positief van aard is. Zo bleken waarschuwingssignalen een positieve impact te hebben op het aantal transacties, de handelsfrequentie en op de ‘capital allocation decision’ of kapitaaltoewijzingsbeslissing (proportie geïnvesteerd in risicovolle en risicoloze activa). Verder, zouden ze ‘overconfident’ (of overmoedig) gedrag kunnen inperken. Men zou dus kunnen stellen dat waarschuwingssignalen de ‘biases’ (of vertekeningen) en heuristieken van individuele investeerders kunnen reduceren. I Preface With this master’s dissertation, there comes an end to four years of education in Business Administration at Ghent University. Four fascinating years of hard work, dedication and perseverance which will be remembered as a unique part of our lives. This master’s dissertation would not have been possible without the help of so many people in so many ways, and we would like to thank them accordingly. At first, we would like to thank prof. Mr. Inghelbrecht for giving us the opportunity to take an in-depth look in this interesting subject. Thanks also to our commissioner Mr. Dierick for the encouraging feedback and useful insights he provided us during the year. Moreover, special thanks to the participants of our experiment for their time and effort to bring our experiment to a good end. Further, we would like to express our gratitude towards Dirk Desmet (retired teacher) and Franck Awouters (Senior FA Oversight Controller at RBC I&TS Belgium) for teaching us the basics of VBA which was a crucial part to construct our experiment. The past four years, we did not only develop ourselves academically, but also personally. Therefore, we would like to thank our friends and our brothers Michiel (brother of Ewout) and Jühl &Thomas (brothers of Sarah) for the unbelievable time we had together. Our deepest gratitude goes to our parents Ann & Peter (parents of Ewout) and An &Hendrik (parents of Sarah) who were of great importance during these four years. Our graduations are also their accomplishment, as they have made us who we are today. We would like to thank them for the unconditional support and for providing us an excellent study environment. II Table of Contents Summary in Dutch ............................................................................................................. I Preface ............................................................................................................................. II Table of Contents ............................................................................................................ III List of Used Abbreviations ............................................................................................... VI List of Tables and Figures ................................................................................................ VII 1 Introduction ............................................................................................................ 10 2 Literature review .................................................................................................... 13 2.1 Traditional finance ..................................................................................................... 13 2.2 Behavioural finance ................................................................................................... 14 2.2.1 Definitions ....................................................................................................................... 15 2.2.2 Building blocks ................................................................................................................. 16 2.2.3 Development ................................................................................................................... 16 2.2.4 Theories ........................................................................................................................... 17 2.2.4.1 Cognitive dissonance theory ............................................................................................... 17 2.2.4.2 Theory of regret .................................................................................................................. 17 2.2.4.3 Prospect theory versus the Expected Utility theory............................................................ 17 2.2.5 Heuristics and biases ....................................................................................................... 18 2.2.5.1 Heuristics ............................................................................................................................. 19 2.2.5.2 Biases ................................................................................................................................... 23 2.2.6 Limitations arbitrage ....................................................................................................... 26 2.2.7 Explanatory factors investor behaviour .......................................................................... 27 2.2.7.1 Risk tolerance ...................................................................................................................... 27 2.2.7.2 Wealth ................................................................................................................................. 27 2.2.7.3 Personal traits ..................................................................................................................... 28 2.2.7.4 Genes................................................................................................................................... 29 2.2.7.5 Sex (or gender) .................................................................................................................... 29 2.2.8 Individual investors ......................................................................................................... 30 2.2.9 Financial education to help investors make decisions. ................................................... 30 2.3 Warning signals ......................................................................................................... 31 3 Methodology .......................................................................................................... 34 III 3.1 Set-up investment laboratory experiment (experimental design) ................................ 34 3.1.1 Sample of participants .................................................................................................... 36 3.1.2 Pricing process of assets ................................................................................................. 36 3.1.2.1 Risky assets .......................................................................................................................... 36 3.1.2.2 Risk-free asset ..................................................................................................................... 40 3.1.3 Course of the experiment ............................................................................................... 41 3.1.3.1 Introduction ........................................................................................................................ 41 3.1.3.2 Financial suitability test and trading periods ...................................................................... 41 3.1.3.3 Final results ........................................................................................................................