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
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: Suggested Citation