The 2008 financial crisis is one of the worst crises that the world has ever gone through in recent times. It created a lot of panic among the investors who invested a lot of money in the NYSE(New York Stock Exchange). It is also said that the main reason for this financial crisis is the bankruptcy of a banking firm named Lehman Brothers. So, have you ever wondered how our own psychology tends to influence the stock market practices that we tend to use?
Psychology tends to influence the investor perception to a great extent. There is a whole sub-discipline within psychology which is called behavioral finance which focuses on the monetary direction that an individual or a stock market takes. The investors mostly realize that their feelings and their sentiment along with temperament tend to influence whether the stock markets tend to be more bullish or bearish. Human behavior tends to play the role of different emotions like greed, anger, etc (Jain R.S., 2018). It has also been found that there are a few instances of immense psychological pressure on the investors to perform really well and make sure that they earn and get a huge profit. Whenever the markets go through a financial crisis, like the 2008 financial crisis or the 2020 COVID-19 pandemic, there tends to be a scare and a sense of panic among the investors because of which they tend to withdraw money from the markets to create less of a loss.
Similarly, whenever there is a sense of great growth rates in the market, like the roaring 1920s in the USA where things seemed to be a lot more optimistic and people had the hope of making a lot of money, the investors tend to have a positive and an optimistic sentiment because of which they tend to pour more money into the markets (Naseem S., et al., 2021).
Investors also tend to show some kind of herd mentality where they tend to follow the behaviors of the majority. These instances can be seen in the dot-com bubble crash of the 1990s. This type of herd mentality prevents them from making effective decisions and hinders them from using the stock markets effectively (Bikhchandani S., & Sharma S., 2001). Behavioral biases like overconfidence, loss aversion, and anchoring can always play the role of a behavioral bias which can influence the behavior of a stock market investor. These behavioral biases also tend to have a profound impact on the thinking capacity of these individuals. It has been observed in various studies that some highly overconfident investors tend to have aggressive and excessive trading practices in the stock market. This results in a lack of awareness of bad news because of which the person tends to overestimate the under-confidence which tends to be present in the stock market. This is one of the reasons that causes investors to make mistakes while they are investing in some company (Painoli G.K., 2022).
Lastly, we can also say that risk perception also plays an important role in how the investor perceives the stock market and invests in it as well. Some of the common risk factors faced by investors are- the unpredictability of returns, Knowledge about the assets, the chance of incurring losses, diversification of the portfolio, etc. Some investors tend to be more aware and careful of the risk that they face while others tend to be more risk-averse because of which they give into high risk stocks/companies easily. (Sindhu P.K., & Kumar S., 2014).
Because of all these factors, we can say that Psychology is able to influence the stock market to a great extent.
References
Jain R.S., (2022). The impact of human behavior and psychology on the stock market. International Journal of Research Publication and Reviews. https://ijrpr.com/uploads/V3ISSUE6/IJRPR4875.pdf
Bikhchandani S., & Sharma S., (2001). Herd behavior in stock markets. IMF staff papers. 47(03). https://www.imf.org/external/pubs/ft/staffp/2001/01/pdf/bikhchan.pdf
Naseem S., et al., (2021). The Investor Psychology and Stock Market Behavior During the Initial Era of COVID-19: A Study of China, Japan, and the United States. ORIGINAL RESEARCH article. Sec. Organizational Psychology. Volume 12
Painoli G.K., (2022). A study on behavioral biases and personal investment decision: Recent Systematic Literature Review
Sindhu S.K., & Kumar S., (2014). Influence of Risk Perception of Investors on Investment Decisions: An Empirical Analysis.
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