Investment Psychology: The relationship between stock prices and investors' behavior

INVESTMENT PSYCHOLOGY: THE RELATIONSHIP BETWEEN STOCK PRICES AND INVESTOR’S BEHAVIOR
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Course: BABA Final Research Project
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Date: 7 Feb 2011

ABSTRACT
The relationship between investor behavior and stock prices is usually determined on a firm by firm basis (Bernstein, 2000, p.115). Investors’ behavior is also monitored through observation of the number of trading and investment in the stock markets. The following research paper intended to investigate investment psychology as well as the relationship between stock prices and investor’s behavior.
In order to acquire the results, a questionnaire was conducted and 250 respondents comprising of business class students, investors, traders and clients interviewed as part of the Questionnaire. Questionnaires, research and observation were the main methods of data collection as these are considered appropriate in acquisition of accurate and detailed information needed for the study.
Findings were analyzed qualitatively and conclusions were made accordingly.
INTRODUCTION
Majority of individuals find the task of beating the market to be quite easy as compared to that of beating themselves in terms of being able to master their emotions while attempting to think independently. Despite the fact that decisions based on natural instincts at times turn out to be the wrong course of action, every individual is comfortable buying stocks when prices are high and are expected to rise and selling when they are at their lowest (Arthur, 1995, p.2). Majority of researchers tend to believe that the study of Psychology in addition to other social sciences reveal truths regarding the efficiency of financial markets and explain majority of stock market anomalies, crashes and market bubbles (Lifson & Geist, 1999, p.49).
A decade ago, economics and psychology were considered to be entirely two fields with having no comparison or linkage. However, in comparatively, quite a recent phenomenon that economists are increasingly looking towards the field of cognitive psychology and neuroscience as to have a greater knowledge of the current and prospective behavior and trends of the investors (Alexander & Dharpe, 1989, p.104). This, in turn, assists them in viewing the forth coming decisions of investors on the basis of realistic assumptions that are made by critically analyzing the minds of the investors so that the results could reflect productivity.
The psychology of the investors in this realm works in a way that his mind focuses upon the recent and past happenings in the stock market and the on-going trends about the rise and fall of particular markets (Gunn, 2000, p. 76). The gravity and implications related to stock prices are quite serious in nature, which normally make the investors risk-averse and certainly, not agreeable to sudden change in decision making.
However, it is also seen as a trend that all investors reflect the same kind of attitudes t...