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STUDYING THE EFFECT OF PERCEPTUAL ERRORS ON THE DECISIONS MADE BY THE INVESTORS BY EFFECTIVENESS OF INFORMATION IN TEHRAN STOCK EXCHANGE COMPANY

Published online: 08 August 2017 ABSTRACT There are many latent factors that are effective on the decisions made by the investors. The factors that the investors are not aware of their effectiveness and make investment decisions. The main purpose of the present research is to study the perceptual factors affecting on the decision making process of the investors and the effect of information on these factors. For this aim, 385 investors of Tehran Stock Exchange Company were selected as a sample through random sampling method and the required data were gathered via the questionnaire. The accuracy of the hypothesizes was tested via a structural equation model. The results obtained from the present study show that the decision making process of the investors is affected by the representative error, overconfidence error and mood state error by 19%. Moreover, overconfidence error is affected by the degree of information by 95% and by the anonymity of the information by 10%. The mood state error is effective on information processing time by 13% and the information processing time is effective on decision making process by 24%.


INTRODUCTION
As the portfolio theory that is used in the investment analysis is based on the assumption that all the investors are risk aversion and seek to the maximizing their efficiency (Sadi et al., 2011, pp. 234). But people usually enter to a perceptual process while estimating the events and selections (Thaler, 1985, pp.201). Most of the financial and economic theories suppose that the investors act completely intellectual in decision making (Kenneth &Nofsinger, 2008, pp.2). But study of behavioral factors as the effective factors on the investor's decision making to gain a deep insight into their decisions is necessary (Ngoc, 2014, pp.6). The investors are not intellectual in behavioral patterns unlike the neoclassic theories. In other words, the investors don't decide intellectually due to some perceptual errors. Some illogical factors same as feelings, culture, religious and ideology are the effective factors that play important role in the behavior of the people in different situations of decision making ( Rich & Oh, 2000, pp.3-7). Some studies has been conducted in different fields of perceptual errors and the circumstances of the effect by these errors on the financial decision making of the investors in financial markets and all of them showed that the investors suffer from some errors. The perceptual errors are based on unconscious mental activities of information processing that all people possess it inherently and they make some predictive deviant from the rationality (Sadi et al., 2011, pp.235-238). The perceptual errors cause that the decision makers process the information incorrectly that leads to incorrect judgments and decisions (Arnot, 2006, pp.59). The present research aims to study the effect of perceptual errors on the decisions made by the investors and the effect of information on the perceptual errors. Finance is an effort to complement of the standards for behavioral Finance theories in psychological aspect in decision making process. Along these believes, Bedi et al in 2007 described behavioral Finance knowledge as a set of financial markets models on the potential N. Yazdani et al. J Fundam Appl Sci. 2017, 9(2S), 1237-12541239 intervention of psychological factors in the financial investors' attitude (Bikas et al., 2013, pp.871). Behavioral Finance paradigm addresses to the circumstances of the investors' attitude and their effect on financial markets and help the investors to learn rational behavior. In fact, the conformity between the feeling and decision making method of the investor is the basis of behavioral Finance knowledge. The behavioral finance is divided into two categories of micro and macro that the micro behavioral finance addresses to the questions as if the individual investors behave rationally or if the perceptual or feeling errors of their decisions are affected (Sadi et al., 2011, 235).

Perceptual Errors
Kent Baker and John Nofsinger in 2002 provided a list of the perceptual errors that the investors encounter them and the most important of these errors are described as following (Baker &Nofsinger, 2002, pp.101-107):

Representative Error
The human brain supposes that some items with similar specifications are equal. The representative is a kind of judgment based on Halo effect. The investors also are affected by this error regarding the good performance of the stock in the past. This effect cause that the investors seek to buy the stock of the companies or funds that had proper performance in the past. The investors rely on the proper performance of the company in the past for their performance in the future.

Familiarity Bias
People usually prefer something that is familiar with. The investors tend to buy some stocks that are familiar with them and suppose that these stocks have lower risk in compare to the unfamiliar stocks.

Mood and Optimism
People in proper mood state have more optimism judgments in compare to the people that are in bad mood. People in bad mood judge more critically.

Overconfidence
Overconfidence is closely related to mood, state and optimism. The investors have over selfconfidence on their abilities. This overconfidence is related to their ability in choosing the profitable stock. They also believe that their predictions will come true. Overconfidence lead to high risk compliance in the investment decisions.

Endowment Effect
This kind of effect cause that people not tend to lose something that they possess. In investment issues, the investors tend to keep their investments.

Status Quo Bias
When the investors encounter with a status that they should make decision, this kind of error effect on the investor and the investor cannot take any action. Changing an investment means that the previous investment was incorrect. This status specially happens when the stock price fall.
This perceptual error cause that people take no action when decreasing the stock price.

Law of Small Numbers
The investors attend to short time intervals that lead to incorrect prediction about the future. The investors think that the current trend will continue in the future.

Literature Review
In this part, the researches related in the subject of study are represented.
A research made by Zacharakis and Shepherd in 2001 on 53 investors in the business environment. These investors were selected from two entrepreneurship institutes named as Denver/Boulder and Silicon. The results obtained by this study have shown that these investors have overconfidence. The degree of this confidence will increase by increasing the information size. Moreover, if the information be anonymity, the degree of overconfidence will increase. This hypothesis stating that higher experience will lead to overconfidence was not approved. If the accessible information increase, people believe more that they make better decisions. While, This research has studied the effect of three states of good, indifferent and bad moods on the behavior of the businessmen. Two experimental tests were conducted, one with sample size of 66 and one with sample size of 72. The results obtained from the research showed that the businessmen in good mood show a bad performance (actually they incurred a loss). In contrast, the businessmen in bad mood and also those in intermediate mood (not bad not good), showed a good action (actually they profited). The reason for these results could be addressed to the point that the businessmen in good mood make decisions with less attention, because they tend to spend less time for processing the information and making decision. They also have overconfidence and undertook high risk (Chan et al., 2003, pp.1).

RESEARCH HYPOTHESIZES
The Hypothesizes of the present study are described as following based on the literature in the field of perceptual errors: 1. The representative error effect on the investment decisions.
2. Overconfidence error effect on the investment decisions.
And according to the researches made by Zacharakis and Shepherd, the following hypothesizes are defined based on information variable: 3. The mood state error effect on the information processing time.
4. Information processing time effect on the investment decisions.
5. The degree of information effect on overconfidence error.
6. Information anonymity effect on overconfidence error.
The definitions for the information variable are described as following:

Fig.1. Conceptual Model of the Research
Information and Higher Anonymity of the Information: the information refers to the data that are sent to the receiver through a significant way (Floridi, 2005, p.2). The anonymity of the information means that the investors are not familiar with the information structure or the information related to a decision is unknown in terms of structure (Zacharakis& Shepherd, 2001, p.5).
Information Processing: a process in which a complete analysis on the investment opportunities and information occur (Zacharakis & Shepherd, 2001, p.6) Research Methodology The research methodology of the present study is applied regarding the objective of the study and descriptive-correlation regarding the nature of the study.  Fundam Appl Sci. 2017, 9(2S), 1237-12541244 The results obtained from the confirmatory factor analysis of exogenous latent variables. Figure 2 shows the measurement model for exogenous latent variables in standard estimation state. As it was shown by the results, all the factor loadings are higher than 0/5 that indicates the convergent validity.      Table 2 shows the summary of the results obtained from the confirmatory factor analysis for the endogenous latent variables.  The results obtained from estimation (the underside of the figure) in the measurement model indicate the relative goodness of the indexes. With regards to the output of Lisrel software, the amount of X 2 calculated as 234/82 that is less than 3 in proportion to the degree of freedom (101) (the ratio of chi square to degree of freedom=2/32). The amount of RMSEA equals to 0/063. The permitted limit of RMSEA equals to 0/10. AGFI, GFI and NFI indexes respectively equal to 0/88, 0/91 and 0/93 that indicate the relative fitting of the model.

MODELING
The multi-variable analysis method was applied in the present study to confirm or reject the Hypothesizes. More professional statistical methods can be used in the multi-variable analysis same as path analysis and structural equations modeling methods. In summary, the structural equation modeling method is a method that studies all the relations between the research variables (independent, mediator, dependent) simultaneously considering the variables as latent.
There are various methods to implement the structural equations model. One of the available methods is covariance-based structural equation modeling that is applied for normal variables and large sample sizes. Implementing the structural equation method with covariance-base methods require specific software that Lisrel software is the most common among them. Therefore, the Lisrel software has been used in the present study to edit the structural equation model. The null hypothesis H0 and H1 should be considered to reject or confirm the significant relations for the N. Yazdani et al. J Fundam Appl Sci. 2017, 9(2S), 1237-12541248 purpose of testing the Hypothesizes. The H0 and H1 are defined as following in regression relationships: H0: there is no significant effect between two variables.
H1: there is a significant effect between two variables.
It should be noted that the rate of standard and normal error for study calculated as 0/05 and the confidence level as 0/95. In the level of 5% error, the critical points in the normal curve are -1/96 and 1/96. As in the normal curve, the observed error level be in the -1/96 and 1/96 limit, the H0 is accepted (there is no significant relationship between the variables) and if the observed error level be higher than the critical point, and if the observed error level be higher than critical point of 1/96 and less than critical point of -1/96, the H1 will be accepted (there is a significant relationship between the variables). Figure 6 and 7 indicate the degree of effect of exogenous latent variables (representative error, degree of information, higher anonymity of the information and mood error) on endogenous latent variables (overconfidence error, information processing time and the investors' decisions). Table 3 shows a summary of confirmation or rejection of the relationships between the variables of the researches. The results showed that all the research hypothesizes were confirmed. Among the results, the degree of information on overconfidence error has the maximum effect. As the equations showed, the amount of R 2 in the investor's decisions variable calculated as 0/19. The estimation results (the underside of the figure) in the measurement model indicate the relative appropriateness of the indexes. Regarding the output of Lisrel Software, the amount of X 2 calculated as 923/71 that is less than 3 with regard to the degree of freedom (the ratio of chi square to degree of freedom=1/58). The amount of RMSEA equals to 0/039. The permitted limit N. Yazdani et al. J Fundam Appl Sci. 2017, 9(2S), 1237-12541249 of RMSEA equals to 0/10. AGFI, GFI and NFI indexes respectively equal to 0/89, 0/91 and 0/94 that indicate the proper fitting of the model. showed that the amount of information has considerable effect on increasing the self-confidence.
The effect that was calculated as 95% in the present study. In other words, information will definitely lead to higher self-confidence in Iranian investors. Therefore, the viewpoint toward these results can be segmented into two categories. View to the investors and view to the market. The individual will have higher self-confidence to choose the stock by having information. In other words, when the individual has more information about one specific stock, he/she has higher self-confidence. But in this part, the individual by having information suppose that he/she can predict the behavior of a stock and achieve more confidence to self and to that stock. The reasons for the view of Iranian investors toward the information can be addressed to the effectiveness of the market or the view to the market. The effective markets are those that provide information for everybody and nobody gain unusual profit. As it was mentioned, if the stock market be effective enough, the role of information will be equal for all. It seems that the Iranian investors perceived this important issue that the stock market is not effective and the information plays a considerable role in that. However, studying the effectiveness of a market should be investigated separately. It is worth mentioning that information gathering is not prohibited.
Rather, this hypothesis states that the individual can affect the self-confidence by 95% through information gathering. Because they think that the market is not effective and they can take action more successfully through information gathering. While, people seek information under normal conditions and finally make decision through information gathering, but the gathered information doesn't create too much self-confidence, because they know that information play a same role for everybody whilst based on the Zacharakis and Shepherd, increasing the information value lead to some complexities and also all of the information cannot be processed completely.
Zacharakis and Shepherd in 2001 stated that the anonymity of the information will effect on overconfidence, the same as the results obtained in the present study. According to the definition,anonymity ofthe information refers to the information of which the structure and kind is not known for all. The effect of this variable calculated as 10%, that's mean less than the effect of the degree of information and its effect seems logical. Since, if you have some information that other people don't have, then you should have higher confidence. But in the present study, a higher effect of this variable on overconfidence was expected. The effect of this variable to such degree may be referred to the supposition of non-confidence of Iranian investors on the information that are anonym regarding the form and structure. In other words, when people achieve some information, they may benefit from them, but that information may have no considerable effect on the confidence of them due to non-confidence to that information and possibly the Iranian investors may avoid using new information and methods. In the 4 th hypothesis, the effect of overconfidence on the decisions made by the investors was approved. In other words, the results obtained in the present study were in conformity of the results in the research made by Zacharakis and Shepherd in 2001. According to the definition, the overconfidence error makes the investors gain confidence that their predictions are correct.
Overconfidence leads to high risk compliance in the decisions of the investors. High risk compliance and confidence in the decision could be considered as the factors in failure in the capital market. When you affected with such conceptual error, you have overconfidence to your analysis and the received information and you cannot identify the main information flows and decide based on some statistics that may be not in conformity with your goals. The degree of effect of this error on the decisions was calculated as 29%. In other words, one change unit in your self-confidence equals to 29 change unit on your decision making. Inefficiency of the market can be considered as one of the main reasons for creating such error among Iranian investors, this item will guarantee the entering into successful information flows or the presupposition that having more information will guarantee the success of a stock, although the factors in formation of a perceptual error should be studied separately. In the 5 th hypothesis, the effect of mood on information processing time duration was approved that is in conformity to the results obtained by Chan et al in 2003. The investor's mood may effect on the degree of information processing that was calculated as 13%. In other words, one change unit in your mood will apply 13 units in the degree of information processing. But why the mood has such effect on information processing among the Iranian investors? According to the research done by Chan, people with good mood spent less time to process the information. These results may be applicable for Iranian investors. Such results may be addressed to the psychological dependency of the investors. In other words, their behavioral dependency to the mood. The importance of this effect refers to the point that people are not aware of being affected by this error. Namely, it could be called as a silent error, but clear. Because you know well that you are high spirited today (clear), but you cannot identify that there is some shortcoming in information processing time period (silent). Subsequently, they ignore the factors that contain information. In the 6 th hypothesis, the effect of information processing time period on the investment decisions was approved in conformity to the research done by Chan et al in 2003. According to the definition presented in the literature review, adapting less time for this process lead to deficiency in decision making. In other words, the investor should be able to consider all the factors in success of a stock through proper and sufficient analysis. But the investor will deprive himself of some information by decreasing the time period for information processing that may contain many values. The degree of effect of this variable on investment decisions calculated as 24%. Meaning that if your information be affected by one change unit, your investment decisions will be affected by 24 change unit. The reason for change in processing time period may be addressed to the change in the mood as confirmed in 5 th hypothesis. Definitely, there are some other factors that effect on information processing time same as the ability to process the information. In other words, people have relative ability in information processing and they cannot analyze the information higher than their ability. According to the R 2 estimation, the perceptual errors apply 19% effect on investment decisions generally.