Do investors' moods affect their investment decisions?
According to Guy Kaplanski, a business professor at Bar-Ilan University in Ramat Gan, Israel, an individual investor's mood can have an important impact on their investment judgment and their attitudes toward reward and risk expectations — in the short term, anyway.
People who are in a good mood tend to be more optimistic about the market, he says, whereas those who are down are more likely to have a negative view of the market.
Previous research has shown that there's a correlation between seasonal affective disorder (SAD) and market patterns. On an aggregate level, "studies have shown that markets are particularly going down in the autumn," Kaplanski says, "but it's difficult to prove whether this is due to personal depression – the winter blues – alone or whether it's also related to something that is happening economically, whether it is probability or coincidence."
In his latest study, entitled "Do Happy People Make Optimistic Investors?" Kaplanski shows a personal link between moods and market movements by boiling things down to the level of an individual and his or her particular frame of mind at different moments in time.
Over the course of one year, his team surveyed a few thousand individual investors in Netherlands to gauge their moods at different points in time and how their moods impacted their views on financial markets. Participants were asked simple and direct questions, "like what is the weather, what's the date and the time, how do you feel right now, are you under pressure, are you in a great mood or a bad mood," according to Kaplanski.
He said: "We found there was a direct link between the answer to their questions and their view of the S&P 500 and their home market, Netherlands. If someone was in a not great mood, then they were pessimistic about the markets. If they were happy, then they were optimistic about the markets."
