Indonesia Fund Market Crisis 2005: Butterfly Effects Hypothesis of Investors Behavior

Abstract

This study argues that investors’ behavior may provide more clear explanation about the caution of Indonesia mutual fund crisis in 2005. The aim of this study is to develop and test the hypothesis of heuristic decision process mechanism of investors’ behavior that would not valid due to complex problem and security fraud. Using primary data for capital market investors and fund market investors, this study suggests that knowledge and understanding about the risk and return of mutual fund are important factors in a decision making process. Furthermore, this study finds that security fraud and obscure information destroy heuristics decision process mechanism and cause investor panic. These research results confirm the butterfly effect hypothesis that a panicky investor withdraw his money from the mutual fund and then trigger the contagion effect of cash outflow stream of huge redemption in mutual fund, and therefore lead Indonesia mutual fund crisis in 2005.