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    • The current issue and full text archive of this journal is available at www.emeraldinsight.com/1757-4323.htmAPJBA3,1 The behavior of Taiwanese investors in asset allocation Angela H.-L. Chen62 Department of Finance, Nanya Institute of Technology, Chungli City, Taiwan Kuangnen Cheng KNC Travel Service, San Francisco, California, USA, and Zu-Hsu Lee School of Management, Marist College, Poughkeepsie, New York, USA Abstract Purpose – This paper aims to identify traits of Taiwanese investors that deviate from the typical rationale governing financial decisions, through the analysis of their asset preferences and investment criteria. It also highlights the post-modern portfolio theory to address the behavior of Taiwanese investors found in our result and in other studies. Design/methodology/approach – The time period between late 2007 and 2008 was our choice for this investigation, being a period of considerable volatility in the Taiwanese market during a major political campaign and a downturn of the economy. We took into account the factors of market environment, investment amount, expected return rate, risk tolerance and investment type to investigate the relationship between these factors and investors’ preferences when selecting assets such as mutual funds, stocks, bonds and foreign currency. The analytical hierarchy process (AHP) method was then employed to analyze the survey data. Findings – Risk tolerance is the most important factor for Taiwanese investors when they design their asset portfolios. However, they prefer stocks to other assets. When market environment and risk tolerance are considered, mutual funds are chosen over and above stocks. Whichever criterion is used, bonds turn out to be the least favored asset. Originality/value – The AHP application for the purpose of this study has not been found. Our analysis echoes the phenonmena of Taiwan’s investment markets known from previous studies. The result clearly provides evidence (e.g. irrational investment and risk-seeking behavior exhibited by Taiwanese investors) applicable to the field of behavioral finance. Keywords Assets, Analytical hierarchy process, Behavioral economics, Taiwan Paper type Case study 1. Introduction Typical models address issues in financial markets based on the efficient-market hypothesis and rationale expectations assumption. Behavioral finance is one subject in the field that deals with investors and their ways of gathering and using information (Fromlet, 2001). How investors learn, adapt, evolve and inter-react with the investment environment (Lovric et al., 2008) underlies the plausible assumption of the Homo economicus model (Backer, 1976; Rosenberg, 1979). However, although investors may beAsia-Pacific Journal of Business capable of researching market information efficiently and then determining investmentAdministration alternatives in an analytical and rational manner, their personal traits (e.g. personality,Vol. 3 No. 1, 2011pp. 62-74 cognition and emotion), and human and social factors can have a major impact on theq Emerald Group Publishing Limited actual decisions they make. For example, investors who have had recent capital gains1757-4323DOI 10.1108/17574321111116405 tend to be more risk resistant or aggressive than those who have just had losses.
    • The level of an investor’s risk tolerance can be related to recent portfolio performance Behavior of(Langevoort, 2003). Taiwanese In Taiwan’s financial markets, the majority of trading volume on Taiwan StockExchange is done by individual investors. More than 20 percent of total trading volume investorsis day trading done by individual investors (Barber et al., 2004). They believe in meanreversion and are reluctant to realize losses (Barber and Odean, 2001; Shu et al., 2005).The market has both an abnormally large trading frequency and each trade generates 63lower returns compared with other markets in Asia (Barber et al., 2006). It has beenquestioned whether these can be simply explained by the fact that the less informed andpoorly trained individuals (Arbel and Strebel, 1983) often trade more frequently andspeculatively, and suffer lower returns as opposed to trained and skilled institutionalinvestors. This investigation was conducted at the dawn of the election for the Taiwanese12th-term president, which was also a time of economic negatives; for instance,rising oil prices, growing inflation and the rising unemployment rate had started toworry Taiwanese investors. Global economic slowdown brought economic challengesand uncertainties to the Taiwanese financial markets (e.g. the island’s export-orientedeconomy is susceptible to an economic downturn resulting from the current globalfinancial crisis). The presidential political campaign also impacted the markets.Kuomintang (KMT – national party) had promised closer economic cooperation withChina, and to enlarge domestic demand by investing in various domestic infrastructureprojects. That same year, Taiwan’s economy finished with a 5.7 percent increase in realGDP. Immediately after the election victory by the KMT candidate on March 22, 2008,the stock market surged more than 6 percent at the opening of the session, and closed upnearly 4 percent. In addition, Taiwan’s currency rose more than 1 percent against USD,its strongest performance since 1998. In a volatile market, the question is how Taiwanese investors develop an investmentstrategy. One may also ask whether their portfolios are assembled in a rational manner,and what criteria govern their investment strategy. Our discussion centers on downsiderisk optimization (DRO) proposed by the post-modern portfolio theory (PMPT), whereasset allocation involves the measurement of risk derived from downside frequency,mean downside deviation and downside magnitude. Investor-specific minimalacceptable return means the absolute risk that an investor is willing to tolerate. Basedon the PMPT, a suitable portfolio[1] is expected to create a stream of steady or frequentincome in a downside market (even if the amount of income is not significant), or, at leastnot often to perform too poorly when the market keeps moving to the negative side. To obtain information about investors’ investment preferences and understandhow the factors such as market environment, investment amount, expected return rate,risk tolerance and investment type affect their selection of portfolio assets, we use asurvey as an investigation tool. Four types of investments are considered in designingthe questionnaire: stocks, mutual funds, foreign currencies and bonds, representing awide range of distinct asset classes. Then, we apply the analytical hierarchy process(AHP) method to analyze the relationship between the decision factors/criteria andinvestors’ preferences in allocation of assets. Under different criteria, the weights for theassets are calculated by AHP to indicate the priority of each asset to investors. In the end,we address the current situation and issues in Taiwan’s investment environment,and discuss the implications behind our results.
    • APJBA 2. Preliminaries3,1 Tolerance for investment risk drives investors’ asset allocation decisions. The behavioral finance literature conceives that risk perception tends to linger when downside volatility increases (Kahneman and Tversky, 1979). Markowitz (1952, 1959) portfolio theory (also known as modern portfolio theory) equates market volatility with risk. Since the efficient market hypothesis dictates that no investors can outperform the market over the64 long run, a higher return may only be expected by taking a higher risk. Risk is a subjective emotional condition (Slovic, 2000). Two dimensions of risk are dread and unknown risks. Dread risk refers to risk beyond our control, and unknown risk is related to risky actions that are new and unfamiliar. In the past, we measured risk and predicted outcomes based on historical, statistical financial performance. To manage dangers and survive uncertainties, risk assessment becomes important in the area of behavioral finance. Behavioral approach evaluates risk based on investors’ perceptions towards risk. Investment decisions normally involve objective risk (e.g. beta, standard deviation) and subjective risk (e.g. investor’s beliefs, attitudes and feelings towards risk). In general, expected return is positively related to the degree of risk. For a downside market, the PMPT proposes an asset allocation that optimizes a portfolio based on returns versus downside risk (Rom and Ferguson, 1993), where downside risk is the likelihood that an investment will decline in price when the market conditions move toward the negative side. This risk is derived from downside frequency, mean downside deviation and downside magnitude, and DRO is to prevent the portfolio from frequently performing too poorly (Swisher et al., 2005). The investor’s tolerance for such risk may be assessed based on how often and how much he/she might lose, and should such losses occur, how long it will take the portfolio to recover. Following the DRO principle, a preferred strategy by investors in a downside market would be to trade frequently, in order to avoid a constant losing streak. This could also produce a steady stream of cash flow even if gains are insignificant. It is normal for investors to be wary of the unknown. The more risk-averse individuals should have selected lower volatility stocks. The predictions of the preferred risk-habitat hypothesis are consistent with the observations by Dorn and Huberman (2010) which include: . These portfolios contain highly similar stocks in terms of volatility. . When these stocks are sold they are replaced by stocks of similar volatility. Since portfolio volatility remains about the same after investors rearrange their securities, investors would have the same trading behavior after the rearrangement. In addition to the above issues with regard to risk, volatility and investor behavior, it is a common belief that institutional investors are better informed than individuals, while obviously, some individual investors are better informed than others. Information asymmetries differ between institutions and individuals (Kyle, 1985; Lev, 1988; Nofsinger, 2001). We would expect that informed investors profit from trades at the expense of those who are uninformed (Grossman and Stiglitz, 1980; Kyle, 1985), and rational investors profit from irrational ones (Cambell, 2000; Barberis and Thaler, 2003). 3. Methodology AHP (Saaty, 1980) is a commonly used method to analyze investors’ decision factors and investment preferences, in addition to other methods such as fussy sets theory
    • and Delphi method. Khaksari et al. (1989) use it for the asset allocation problem faced by a Behavior ofportfolio manager. Puelz and Puelz (1991) propose a solution to determine the allocation Taiwaneseof an individual’s assets using AHP, which decomposes a problem into a hierarchicstructure of objectives, criteria and alternatives. Puelz (1991) apply AHP in the selection investorsof the appropriate life insurance contract, given a set of competing contracts to choosefrom. Saraoglu and Detzler (2002) present an AHP-based framework for the selection ofmutual funds. Their model identifies the most suitable funds within an asset class 65that harmonize with the objectives and preferences of investors. Using the hierarchyapproach on investment choices, Kritzman and Page (2003) perform a simulationanalysis and confirm that under certain assumptions security selection has a greaterimpact on portfolio returns than asset allocation. Hin et al. (2006) apply AHP to developan international real estate asset allocation model. There are other types of financialproblems using AHP that may be found in the literature, such as the assignment ofsovereign debt ratings (Johnson et al., 1990) and the determination of investor suitability(Bolster et al., 1995). These AHP examples show its broad application to variousfinancial models in the field. However, to our knowledge, no applications have broadlyincluded different types of investment alternatives along with the investor’s subjectivevaluation of assets for the asset allocation problem. In this paper, we use AHP to address the suitability of the portfolio based on anindividual’s preference. The standard AHP procedure consists of several steps outlinedas follows: (1) Identify attributes, factors, or criterion variables that may be associated with the problem and the goal. The goal is defined based on the decision maker’s viewpoint. (2) Present the problem using a hierarchical structure under the goal (top level). Each intermediate level includes a set of criteria/factors associated with the level immediately above it. The bottom level usually consists of decision alternatives. A survey is conducted to obtain respondents’ comparisons on factors for each level of the hierarchy. (3) Construct sets of pairwise comparison matrices for each level under the goal. Within the same level, a set of n £ n matrices is obtained by comparing all n factors (assuming n factors in this level), where each matrix is generated under one factor in the level immediately above. The elements of a matrix A aij ; i; j ¼ 1; 2; . . .n are the comparison scores of factor i to factor j using a nine-point scale system shown in Table I. Note that aji ¼ 1=aij should hold. (4) Calculate the weights for factors in a level. Using these weights on the eigenvectors from the matrices in the next lower level, hierarchical synthesis proceeds with summing over the weighted eigenvector entries for each factor in this lower level. (5) Evaluate the consistency of the results from pairwise comparisons due to the transitivity consideration of AHP. The maximum eigenvalue of an n £ n matrix lmax is used to calculate the consistency index (C.I.), where C:I : ¼ ðlmax 2 nÞ=ðn 2 1Þ. This index is compared to the target one which is called random consistency index (R.I.) shown in Table II (an example for n ¼ 1; 2; . . .10). The consistency ratio (C.R.), where C:R: ¼ C:I :=R:I :, is measure whether or not the subjective judgments of the respondent to the survey is considered as consistent (inconsistent if C:R: $ 0:1, otherwise consistent).
    • APJBA Numerical rating Linguistic scale3,1 9 Extremely preferred 8 Very strongly to extremely preferred 7 Very strongly preferred 6 Strongly to very strongly preferred66 5 Strongly preferred 4 Moderately to strongly preferred 3 Moderately preferredTable I. 2 Equally to moderately preferredPairwise comparison 1 Equally preferredscale for one factorto the other Sources: Saaty (1980, 1986) Size of matrix 1 2 3 4 5 6 7 8 9 10Table II. R.I. 0 0 0.58 0.9 1.12 1.24 1.32 1.41 1.45 1.49Randomconsistency index Source: Saaty (1980) If inconsistent, a further review and revision on this respondent’s judgments is needed until the matrix shows consistency. (6) Steps (4) and (5) are performed for all levels of the hierarchy. Under each investment criterion, different rankings of investment alternatives (i.e. four assets – stocks, mutual funds, foreign currencies and bonds, in our problem) are obtained based on the sample investors’ responses using the rating scale in Table I. These rankings are expressed in terms of weights and these weights are normalized. In the end, the overall weights for investment alternatives are calculated, where the weight for an alternative may be regarded as the fraction of capital that the investor allocates to this alternative (according to his or her preferences). “Expert Choice” commercial software is designed particularly for the implementation of the above AHP procedure. We use this software to facilitate AHP calculations and integrate the judgments of the sample investors. The analysis is presented in the following section. 4. Analysis of survey data Market environment, investment amount, expected return rate, risk tolerance and product type are common considerations (or criteria) addressed in the existing literature and business reports for asset allocation (Yang, 2005; Wang, 2008). “Market environment” refers to all of the forces that affect the decision process as investors try to select suitable assets. “Investment amount” means the amount of capital an investor is willing to allocate to an asset. “Expected return rate” is the ratio of capital gain or loss on an investment with respect to the amount invested. “Risk tolerance” indicates the degree of uncertainty that an investor can cope with, resulting from a fluctuation on the portfolio performance. Thus, if an investor is willing to take considerable risk for a potential high return (e.g. stocks of startup companies), he/she is said to have a high-risk tolerance.
    • Otherwise, this investor is considered as having low or little risk tolerance. As for the Behavior oftype of financial products, it reflects the intrinsic characteristics of different tradable Taiwaneseassets. For instance, there are convertible bonds and zero-coupon bonds, each withdifferent conditions set out. For investment funds, their types include money market investorsfunds, bond funds and equity funds, etc. Our study considers four major types of investment vehicles (also called assets) usedby Taiwanese investors (Yang, 2005; Wang, 2008): stocks, mutual funds, bonds, foreign 67currency. We construct an AHP model (Figure 1) that includes the above-mentionedinvestment criteria and assets, followed by an analysis of Taiwanese investors’preferences and concerns in the markets. The goal is to explore suitable asset allocationusing Taiwan as a case study, because it is distinguished by its interesting investmentculture, political environment and financial markets. Note that “suitable asset allocation”is defined as the assets invested that are appropriate to the investment objectives,financial needs and the level of sophistication of the investor; however, this allocationneed not be optimal (Bolster et al., 1995). Investors were randomly selected to answer our survey questionnaire and 50 validresponses[2] were collected (see the Appendix for details). Each investor was asked to makecomparisons between criteria, and between alternatives under each criterion, following thestandard AHP procedure. The results are shown in Tables III and IV, respectively. Based on Table III, we obtain lmax ¼ 5:081 and C:R: ¼ 0:018 (n ¼ 5). Since C.R. is# 0:1, the result is considered as consistent. It shows that risk tolerance is the most Suitable asset allocation Market Investment Expected Risk Product environment amount return rate tolerance type Figure 1. Decision hierarchy for multi-attribute asset Stock Mutual funds Bonds Foreign currency allocation Market Investment Expected Risk Investment Priority vector environment amount return rate tolerance type (or weights)Marketenvironment 1.000 1.606 0.829 1.037 1.434 0.226Investmentamount 0.623 1.000 1.257 0.706 1.034 0.178Expectedreturn rate 1.207 0.795 1.000 1.095 1.097 0.206 Table III.Risk Pairwise comparisontolerance 0.965 1.417 0.914 1.000 1.788 0.231 matrix and the resultingInvestment priority vector fortype 0.697 0.967 0.912 0.559 1.000 0.159 investment criteria
    • APJBA Overall3,1 Market Investment Expected Risk Investment priority Overall environment amount return rate tolerance type vector ranking Stock (ranking) 0.264 (2) 0.302 (1) 0.299 (1) 0.246 (3) 0.289 (1) 0.2778 168 Mutual funds (ranking) 0.310 (1) 0.257 (3) 0.247 (3) 0.278 (1) 0.239 (3) 0.2689 2Table IV. BondsPriority vectors under (ranking) 0.188 (4) 0.182 (4) 0.193 (4) 0.225 (4) 0.201 (4) 0.1986 4criteria and the overall Foreignvector for investment currencyalternatives (ranking) 0.238 (3) 0.259 (2) 0.261 (2) 0.251 (2) 0.271 (2) 0.2547 3 influential factor for Taiwanese investors when making their investment decisions. Market environment comes second, and third, expected return, investment amount and investment type. Similarly, under each criterion we have a comparison matrix and priority vector (consisting of 4 components due to 4 alternatives, n ¼ 4 in the lowest level). Table IV shows these vectors for all criteria and their combined – the overall vector whose components show the ranking of investment alternatives with all criteria considered. Note that the overall vector is the weighted average of the priority vectors for different criteria, where the weight for each criterion is the component in the priority vector obtained from the 5 £ 5 matrix for the middle level (5 components in this vector due to 5 criteria, shown in the last column of Table III). According to Table IV, when investors are concerned about the market environment, mutual funds are their first investment choice, followed by foreign currency, stock and bonds. However, considering the allocation of capital over assets, in order of priority, they tend to invest the largest amounts in stocks, then foreign currency, then mutual funds and finally, bonds. As far as investors’ expectation on the return, stock appears to be the most popular choice, then foreign currency, then mutual funds and lastly, bonds. As for whether an asset may meet the degree of uncertainty in the market that an investor is willing to tolerate, Taiwanese investors first consider mutual funds, followed by foreign currency, then stock and lastly, bonds. Considering the criterion of investment type, the preference list would be in this descending order: stock, foreign currency, mutual funds and then bonds. Taking into account all of these investment criteria, Taiwan investors generally like stock the most, then mutual funds, followed by foreign currency and finally, bonds. 5. Implications behind the results This investigation was conducted at dawn of the election for the Taiwanese 12th-term president. Both the political campaign and a looming economic downturn resulting from the global financial crisis have added unknown variables to the market. As indicated earlier, Taiwanese investors favor the mean-reverting trading strategy as a short-term investing method. Ignoring the transaction costs, this strategy has been a great success since 1995 (Khandani and Lo, 2007). Using this simple strategy, investors would pick assets with the worst previous one-day returns and short sell the ones with the best
    • previous one-day returns. On the other hand, investors tend to hold in their portfolios Behavior ofinvestments of similar volatility, and thus would trade with the same behavior Taiwanese(Section 2). The above indicates one reason that Taiwanese investors consistently havethe high-frequency trading behavior. investors Our survey uncovered some interesting behavior exhibited by Taiwanese investorswhen facing great uncertainty in the investment environment. The descending orderof preference for most investors in four types of assets is stock, mutual funds, foreign 69currency and bonds, when overall factors involved in asset selection are taken into account;however, stock is ranked third when just the factor of risk tolerance is being considered.Comparing these four assets, bonds generally are considered as a safer long-terminvestment class, foreign exchange may have higher volatility involving the unknownfrom the outside market, and mutual funds carry hidden costs as well as higher transactioncosts. The investor who trades frequently apparently favors stocks. Investors may findday trading entertaining; or they are simply overconfident! The above provides anindication of the strong risk-seeking behavior of Taiwanese investors, which is consistentwith the results from prior studies (Shu et al., 2005; Barber et al., 2006; Chang, 2008). As KMT government promised to stimulate domestic demand by investing in domesticinfrastructure projects (the estimated amount was US$ 130 billion), a portfolio should beconstructed to counter a potential price surge, in response to the pressure of inflation causedby the tentative, promised massive government spending. Commodities may flourishunder this situation. A less informed, poorly trained individual may want to consider a fundthat manages industrial or agricultural commodities. In addition, bonds should performbetter than stocks as rising interest rates hurt corporate profits and make economic growthdifficult. Even cash or foreign currency is capable of providing a better return than stocks,since governments (or foreign governments) may raise short-term interest rates to giveinvestors an incentive to capture the escalating rates through short-term bank deposits. Studies show that investments react negatively to uncertainty under certainassumptions (Nakamura, 1999; Saltari and Ticchi, 2005; Femminis, 2008). If investorspredict that deflation would occur after KMT takes over the administration (e.g. negativehousing market, higher unemployment rate and reductions of government spending),a rational investment strategy might follow in the following descending order: bonds,currency, mutual funds and stocks. Bonds should be a heavier percentage of the portfoliobecause the steady income from long-term treasury bonds, for example, would be worthmore than falling consumer prices. Also, having cash in a bank account would be a goodrisk-aversion strategy. However, the result is otherwise, and indicates an overall tendency for Taiwaneseinvestors to choose stocks as an investment tool. This can be understood by the “familiaritybreeds investment” theory (Huberman, 2001) that asserts investors tend to invest in thefamiliar when building a portfolio, often ignoring rational principles. Stocks are visible andexposed favorably in the media (Lovric et al., 2008); this surely is the case in Taiwan. Another factor that rules investors’ behavior is overconfidence (Odean, 1999). Shiller(2000, p. 144) believes that most investors “tend to make judgments in uncertainsituations by looking for familiar patterns, assuming that future patterns will resemblepast ones [. . .].” Taiwanese investors tend to be more optimistic (Hsu and Shiu, 2007) andthus, trade too often and too overconfidently. Mutual funds are managed professionally,where risk is shared among various investments and the transaction cost is generallylower. The performance of mutual funds is better than the index performance, especially
    • APJBA during a period of financial crisis (Kuo and Chi, 2000). The study by Shu et al. (2002)3,1 indicates that in Taiwan, small investors tend to favor large funds, where it is easy to search for information and chase past winners with high turnover once fund performance improves. The gain of these funds is shared among investors and thus the individual gain may not be appealing. Further, Taiwanese investors believe that trading success is attributable to their own innate ability. As such, mutual funds are less preferred than70 stocks. The above overconfidence also implies their tendency to be aggressive when investing, rather than opting for conservative alternatives. Overconfidence along with familiarity with stocks made investment in mutual funds and foreign currency slip to a place beneath stocks, with bonds becoming the least favored. To sum up, Table III shows that risk tolerance is the most influential factor for Taiwanese investors when they make investment decisions. Market environment comes second, and then expected return, investment amount and investment type. This implies investors’ concern about the risk associated with the political uncertainty, since they are unsure of Taiwan’s investment environment. By looking at Table IV, when taking into account the potential risk behind the market and the degree of such risk investors can take, mutual funds is chosen over stocks. However, stocks are still a priority over bonds, which are generally perceived to be a safe form of investment. When investment amount and investment type are considered, investors go back to stocks again; stock is highly rated as a return tool. This further implies the primary role of stocks in Taiwanese investors’ selection of suitable assets, where we conclude overconfidence dominates the behavior of Taiwanese investors. They believe they can rely on their own trading knowledge (e.g. the mean-reverting strategy as a short-term investing method) using the tools they are familiar with (e.g. stocks) to outperform the markets. 6. Concluding remarks Why do stocks receive preferential treatment in a typical shallow domestic market (Lin and Chen, 2006), and simultaneously, stock prices appear to be higher than those of other countries? Investors are driven by their expectation of how the stock is moving forward on price more than by whether the stock price is high or low. When the investment environment appears to be unstable, the investor tries to gain profit within a short time frame. Thus, most of these individual investors are speculative and as a result, stocks have the shortest trade duration in the market (under five days) (Han et al., 2009). If investors are assessing the risk based on how often and how much they might lose money within a certain period of time, according to the PMPT and DRO (Section 2), stocks may be a perfect alternative for investors. That provides one explanation for Taiwanese investors’ preference for stocks, as our survey result shows. According to the latest survey from E-ICP, the largest Taiwanese online consumer marketing research firm, 75 percent of investors still prefer low-risk, low-return (or even negative-return) time deposits to any other type of investment. On the other hand, our study reveals that those who do trade prefer stocks. The results above show that one investor group exhibits risk-averse behavior whereas the other demonstrates risk-seeking behavior. This seems an irrational and contradictory phenomenon; however, one cannot conclude that investors are unpredictable. A belief in the mean reversion trading strategy explains why Taiwanese investors choose stocks rather than other investments. Stock may be the convenient tool for this strategy because it requires fast and frequent execution.
    • Fama’s (1996) efficient market theory asserts that the prices of securities reflect all Behavior ofavailable information that impacts securities’ value, and that massive publicly available Taiwaneseinformation worsens an individual’s capability to outperform the stock market as a whole.Since most individuals are neither well-trained nor well-informed, investors repeatedly investorsreveal patterns of irrationality, inconsistency and incompetence when facing uncertainty.As the government gradually liberalizes the markets, more financial products such ashedge funds and options surface to compete for attention. The market is becoming more 71complicated than ever. However, stock traders can potentially gain financial advantage byunderstanding the link between behavior and finance. To avoid self-sabotage, one has tokeep in mind that bounded rationality has its limitation, and the optimum purpose ofinvestment is to create wealth rather than justify decisions made in the past. Studies show that qualified foreign institutional investors (QFII) perform better thanindividual investors (Han et al., 2009; Lin and Chen, 2006). Efficient markets preventinvestors, trained or untrained, from constantly outperforming the overall market.Most investors do not behave rationally and have unrealistic expectations of highprofits (Waerneryd, 2001). Institutional investors can easily profit from this consistentirrational investing pattern, and skilled investors can benefit at the expense of unskilledinvestors. As the Taiwanese Government is relaxing the cross-strait policy, we wouldexpect that more Taiwanese firms that had invested heavily in China in the past to returnand reinvest in operations in Taiwan. It may be the trend that these firms will focus onR&D and logistics centers, as raw materials are scarce and labor costs are higher inTaiwan. It is our suggestion that individual investors can obtain insights from QFII’sstrategies in stocks related to advanced R&D technologies. In sum, this study confirms some known behavior patterns exhibited by Taiwaneseinvestors that also deviate from the rationale behind investment decisions assumed intypical financial models. It may be a challenge for financial managers to help an investordesign a suitable portfolio of assets that can generate a higher return, especially whenportfolio managers may not consider the investor’s own asset preference is effective.To address this problem, our next study might be to develop a model for selectinginvestment options under each asset type, and to construct a portfolio based on theinvestor’s preference in assets. (We can use weights or the proportions of capital investedin each asset to imply this preference.) The goal could be to optimize some measure of theperformance of a suitable portfolio in comparison with that of the portfolio designedwithout this preference. We will explore this problem in future research.Notes 1. A suitable portfolio is a set of assets held that are appropriate to the investor’s investment objectives, financial needs and level of sophistication. 2. We pre-screened participants and selected 50 respondents that have knowledge of all the investment alternatives addressed in this study. (Not every investor has a good understanding of stocks, mutual funds, foreign currency and bonds.) This was to ensure the usefulness of the sample responses, although this pre-screening has reduced the sample size.ReferencesArbel, A. and Strebel, P. (1983), “Pay attention to neglected firms”, Journal of Portfolio Management, Vol. 9, pp. 37-42.
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    • APJBA Wang, C.Y. (2008), “A study on a multi-level latent class framework for products in the financial services sector”, unpublished Master thesis, Soochow University, Taipei (in Chinese).3,1 Yang, G.Y. (2005), “A study of financial tools preference for people: a case of Taipei city and Kaohsiung city”, unpublished Master thesis, I-Shou University, Kaohsiung (in Chinese). Appendix74 Five common demographic variables were used as measures of the characteristics of a population: age, personal (annual) income, gender, education and occupation. The questionnaire was administered to a convenience sample of 60 people. We randomly chose general public who live in north part of Taiwan to be our respondents to complete the survey in their leisure time. A pre-screening was undertaken, and a valid sample of 50 respondents was obtained for our analysis. Of the respondents, 66 percent were male, and the average age of the respondents was 26.6 years old. The median personal income range was US$9,001-$15,000. Table AI summarizes the demographic characteristics of the respondents. % Gender Male 66 Female 34.0 Total 100.0 Age 18-25 20.0 26-35 44.0 36-45 16.0 46-55 12.0 56-65 8.0 Total 100.0 Occupation Service worker 36.0 Technician 16.0 Government official 8.0 Entrepreneur 20.0 Teaching profession 8.0 Blue-collar worker 8.0 Student 4.0 Total 100.0 Education Junior high 8.0 Senior high 14.0 University 72.0 Master degree or above 6.0 Total 100.0 Personal income range (US$) , 9,000 35.0 9,001-15,000 38.0 15,001-30,000 19.0 . 30,001 8.0Table AI. Total 100.0 Corresponding author Zu-Hsu Lee can be contacted at: zuhsu.lee@marist.edu To purchase reprints of this article please e-mail: reprints@emeraldinsight.com Or visit our web site for further details: www.emeraldinsight.com/reprints