The Role of Feelings in Investor Decision-Making

Abstract

This paper surveys the research on the influence of investor feelings on equity pricing and also develops a theoretical basis with which to understand the emerging findings of this area. The theoretical basis is developed with reference to research in the fields of economic psychology and decision-making. Recent advancements in understanding how feelings affect the general decision-making of individuals, especially under conditions of risk and uncertainty [e.g. Loewenstein et al. (2001). Psychological Bulletin 127: 267-286], are covered by the review. The theoretical basis is applied to analyze the existing research on investor feelings [e.g. Kamstra et al. (2000). American Economic Review (forthcoming); Hirshleifer and Shumway (2003). Journal of Finance 58 (3): 1009-1032]. This research can be broadly described as investigating whether variations in feelings that are widely experienced by people influence investor decision-making and, consequently, lead to predictable patterns in equity pricing. The paper concludes by suggesting a number of directions for future empirical and theoretical research.

The Influence of Affective Reactions on Investment Decisions

“…Finally, despite the amount of data available, investors do not have complete information and seldom have a clear picture of what is really going on with their investments. Therefore, financial markets have most of the characteristics that induce people to rely on their affective reactions (Lucey and Dowling [2005]). This kind of feedback is mostly used in complex contexts in which an analytic assessment of the situation is particularly difficult and cognitively demanding.…”

Fast profits: Investor sentiment and stock returns during Ramadan

“…The important role played by religion has been highlighted in several earlier studies. Weber (1905) argued that Protestantism fueled the 1 For a comprehensive review of the theory and evidence on this line of research, see Shiller (2000), Hirshleifer (2001), and Lucey and Dowling (2005).…”

Piety and Profits: Stock Market Anomaly During the Muslim Holy Month

“…Dowling and Lucey (2005) and Kamstra et al (2000) present international evidence that seasonal variations in biorhythms and disruptions in sleep caused by changing to and from daylight saving time affect stock returns. Finally, Edmans et al (2007) investigate the impact of international soccer results and find a significant market decline after losses by national soccer teams in international competitions.…”