Ming-Ming Lai, Lee-Lee Chong and Siow-Hooi Tan INTRODUCTION This chapter describes and discusses past and future challenges in behavioral finance in Malaysia. The Malaysian stock market is not considered fully developed, as the investors can easily overreact to market rumors, economic development, and speculative political issues. Hence it is interesting to discover how Malaysian investors make investment decisions. Malaysia, an eminent market force, has drawn global attention and debate, particularly on the measures taken to counteract the 1997 Southeast Asian financial crisis and stock market crash. Back in 1997, Business Times (1997) described Kuala Lumpur Stock Exchange (currently known as Bursa Malaysia) as driven by rumor and strong herd mentality rules. Stock players herded together and acted the assumption that they needed to cut their losses and get out fast, just like everyone else. Ironically, facts and statistics were irrelevant. Toh (1997) described the Malaysian stock market scenario in 1997 as one in which both retail and institutional market players are not always rational. Investors are mainly guided by sentiment. Do investors improve their rationality over time? This chapter provides empirical evidence of investor behavior from various perspectives, ranging from investment practices to overreaction. The background of the Malaysian stock market will be discussed next. Following this is an examination of the past empirical research on investment practices, investor behavior and the overreaction hypothesis, an application of the contrarian investment strategy of buying past loser stocks and selling past winners. We conclude with general remarks and challenges as well as...
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