Emotions and investors' behavior
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The present paper analyzes how emotions influence investors' behavior and sheds light on their importance in a complex environment like the financial market in which people must face high levels of uncertainty and information overload. Investors must use intuitive strategies to manage uncertainty and the difficulty to understand the future trend of the market. Further, the amount of information available creates a cognitive load that obliges investors to select a subsample of data to use when making a decision. Emotions help these cognitive actions driving attention towards the stimuli that are more affectively loaded and facilitating inferences about the future performance of the market. The paper stats describing the role of emotions in decision processes, then it presents how they influence the perception of the risk-return correlation and the selection of information investors use to make their portfolio decisions. Finally, the paper addresses other investors' behaviors that are difficult to explain on the basis of classical financial theories, but can be understood thanks to the contribution of psychological theories and taking into account the role of emotions in the decision processes.
- Financial Markets
- Behavioral Finance