How Investor Sentiment Impacts Financial Decision-making Behavior: From A Cognitive Neuroscience Perspective

Abstract

In financial markets, irrational behaviors of investors are an important driver of the noise market, and such irrationality is fueled by changes of sentiment of investors. Then how the investor sentiment impacts their financial decision-making behaviors? First, this paper, from a cognitive psychological perspective, explains the mechanism of how investor sentiment and market sentiment are developed; secondly, based on a method of cognitive psychology and neuroscience, we build the models on how investor sentiment impacts risk decision and intertemporal decision. This paper concludes that the investor sentiment is a result of conflicting perceptual analysis and cognitive processing, and it further develops into market sentiment through “information adverse filtering” and “unification of belief”; these sentiments exert implications on the risk decision and intertemporal decision through emotional processing and situational force.