It is noteworthy that the two stocks that contributed most to the rise in the Australian sharemarket on Monday, National Australia Bank and QBE Insurance, were the subject of market moving media reports but no ASX announcements.

NAB shares got a kick along from a report in the Sunday Times in London that Spanish bank Banco Santander was contemplating a bid for NABs Clydesdale and Yorkshire banks.

QBE shares jumped 3.3 per cent on the back of a report in The Australian Financial Review that relatively new chief executive John Neal was set to cut about 700 jobs in Australia as part of a bid to save $US200 million by 2014.

It is clear from the sharemarket reaction that many investors took these two reports as signals to buy.

The NAB buyers must think it a positive for NAB to be rid of the UK business, while the QBE buyers must be reassured that promised cost cutting will eventuate through getting rid of at least 15 per cent of the local workforce.

Chanticleer reckons this is knee-jerk investing at its worst. It displays a lack of understanding of the main profit drivers of both companies. Before analysing these drivers, it is worth commenting on the proven dangers of impulsive share buying.

While the Financial Review and Sunday Times provided a valuable service to readers by 563

putting the focus on key market developments surrounding NAB and QBE, any leap into the market based on these reports could well backfire.

Yet it is common for investors with low levels of emotional intelligence to get it wrong. This view is certainly supported by the findings of a study called Emotional Intelligence and Investor Behaviour, published several years ago by the Research Foundation of the CFA Institute.

Using data collected from a survey of 401(k) pension fund investors in the United States, the authors show that investors who score highly on tests of emotional intelligence tend to exhibit behaviours that correlate well with good investment performance.

The study, by John Ameriks from Vanguard Group, Tanja Wranik of University of Geneva, and Peter Salovey of Yale University, was careful to say that emotional intelligence was different to being emotional or being in touch with ones emotions. It is about understanding your emotions and using them productively.

Most investors have difficulty overcoming fear when prices are falling, so they buy too little; then they become subject to greed when prices are rising and sell too little or hold too long, according to a preface to the report, written by Laurence Siegel.

The study says there are many emotionally laden decisions in investing, including how much active management to use, how frequently to trade, how concentrated ones portfolio should be, how extensively to use risky or novel strategies, and, perhaps most importantly, how much to save and invest (as opposed to consuming).

All this points to the need for financial advisers to make their clients aware of the constructive and destructive role that emotions can play in financial decision making.

a) Would capital markets research or behavioural research in accounting isolate whether the movement in the share prices of QBE and NAB was linked to the respective news announcements?

b) How would you test whether emotional intelligence affects investment behaviour and would this issue be best addressed using capital markets research, Positive Accounting Theory or behavioural research? pls be quick