Abstract
This paper surveys the research on the influence of investor feelings on equity pricing, and also develops a theoretical basis with which to understand the emerging findings of this area. The theoretical basis is developed by reference to research in the fields of economic psychology and decision-making. Recent advancements in understanding how feelings affect the general decision-making of individuals, especially under conditions of risk and uncertainty (e.g. Loewenstein et al., 2001), are covered by the review. The theoretical basis is applied to analyse the existing research on investor feelings (e.g. Kamstra, Kramer and Levi, 2000; Hirshleifer and Shumway, 2003). This research can be broadly described as investigating whether variations in feelings that are widely experienced by people influence investor decision-making and, consequently, lead to predictable patterns in equity pricing. The paper concludes by suggesting a number of directions for future empirical and theoretical research.
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