Role of Greed and Fear Index in Investment Decision Making

Abstract

Investor confidence, emotions, and psychology play a vital role in driving market upturns and downturns. Investors have gone from feeling highly optimistic with the share market regularly reaching new record highs in the period 2005-2007, to extremely pessimistic with the market falling to five-year lows in March 2009 resulting in many investors seeing their investments fall sharply in value. Periods of high optimism or exuberance are generally associated with greed while pessimism is generally powered by fear. 2020 lockdown and then sudden dip in the market price was an excellent example of fear and its influence on the market. Markets do move in cycles, and the drivers of booms and busts may change, but investor behavior doesn’t. Since the onset of the recent Indian financial crisis in March -April 2020, many investors have been in the grip of fear, paralyzed to act not wanting to crystallize losses or make the wrong decision, leading to inertia in some cases and just plain bad investment decisions in others. Many of us will undoubtedly look back on this time and realize it was a wasted opportunity, with many stocks representing outstanding value. This paper explores some typical investor behavior, the calculation of the Greed and Fear Index, and the role they play in investment decision-making.