Do Emotions Influence Investor Behavior?

Abstract

Despite much discussion in the psychology and marketing literature as to how emotions influence decision-making, this area of analysis has been largely neglected in the finance literature. We redress this important gap by using proxies for emotions drawn from the news and social media to evaluate their influence on investment decisions and ultimately asset pricing. We find strong evidence to support that emotions do influence investor decision-making and provide important insights into the nature of this relationship. In general, we find those positive emotions such as trust and optimism are more influential in shaping investors’ reactions than are negative emotions. Finally, the emotions based on the news media listings have a greater influence on stock valuations than those based on social media listings.