Appraisal of Change in Investors’ Behaviour During and After the Speculative Bubbles and Crashes of the Nigerian Capital Market

Abstract

The high appraisal of the aggregate market in respect to high price earnings ratio and high asset prices experienced in the equity and asset markets in the end of 1990s and the imminent fall 2008 ascribed to the speculative bubble crash and consistent with investors’ irrational behaviour, wrong human judgement of the 2008 market decline due to bad credit lending. It is against this background, that the study appraises how both active private and institutional investors’ are influenced by these biases and what influences them to change their investment portfolio during and after the speculative bubble and crash of 1998 to 2009. The use of questionnaires was adopted and directed to both institutional and private investors to get an understanding of what their trading pattern was like; and looks at the behavioural bias that influenced their method of stock picking in the past. The result obtained during the analysis shows that market participants during the speculative bubble and decline of the market are irrational in their decision and this change the composition of the market. During the high valuation in equity price of companies, behavioural factors influenced investors’ decision. This result shows that the fundamental value of a company did not affect market overvaluation. The media also played an important role in disseminating information to both investors. Media proved to be most effective in determining the fundamental valuation of assets today when personal intuition has a great impact on investment decision. The overconfidence bias also influences the decision of investors’ greatly during the speculative bubble this explains the self-attribution and hindsight bias in investors. The fact that most investors’ consider the market overvalued shows the manifestation of this bias. This supports the EMH theory that investors’ think that they can predict and outperform the market. Conclusively, the common knowledge of the factors underlying the speculative bubble before its imminent burst and the way psychological factors influences our decisionmaking should stand as a guide against a reoccurrence of this phenomenon and improve the efficiency of today’s reviving financial market.