Chapter 25: The Psychology of Trading and Investing

Investor Behavior: The Psychology of Financial Planning and Investing. H. Kent Baker and Victor Ricciardi, editors, 459-476, Hoboken, NJ: John Wiley & Sons, Inc. , 2014

Posted: 14 Apr 2014 Last revised: 10 May 2014

Date Written: February 10, 2014

Abstract

In contrast to the assumption of standard economic theories, human beings cannot always make rational investment and trading decisions. Thus, psychological explanations are needed to shed light on the complexity of actual decision-making processes. The purpose of this chapter is to provide an overview of relevant psychological perspectives to explain trading and investment decisions. Starting on the individual level, the chapter examines how personality, mood, affect, and cognitive biases shape investment and trading decisions. Next, the chapter moves to the societal level and discusses how herding, social norms, cultural norms, and ethics play a role in financial decisions. Finally, the chapter shows how news, rumors, and market mood influence trading behavior on the macro level.

Keywords: psychology, trading, investing, affect, cognition, norms, behavioral finance, traders, personality, behavioral finance, behavioral economics, behavioural economics

JEL Classification: A12, D81, G00, G30, G10, M00, M10, M41

Suggested Citation

Pitters, Julia and Oberlechner, Thomas, Chapter 25: The Psychology of Trading and Investing (February 10, 2014). Investor Behavior: The Psychology of Financial Planning and Investing. H. Kent Baker and Victor Ricciardi, editors, 459-476, Hoboken, NJ: John Wiley & Sons, Inc. , 2014, Available at SSRN: https://ssrn.com/abstract=2424317

Thomas Oberlechner

Webster University ( email )

470 E. Lockwood Ave.
St. Louis, MO 63119
United States
+43 1 269 92 93/36 (Phone)

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