Psychology influences investment choices from "summary" of Irrational Exuberance by Robert J. Shiller
Investors' choices are not always driven by rational analysis or careful consideration of data. In fact, human psychology plays a significant role in shaping investment decisions. This influence can lead to both irrational exuberance and irrational pessimism in the financial markets. As social beings, humans are susceptible to herd behavior. When everyone around us is buying a particular stock or asset, we may feel a strong urge to join in, fearing that we will miss out on potential gains. This herd mentality can create bubbles in the market, driving prices far above their intrinsic value. Conversely, fear and anxiety can also dominate investors' thinking, causing them to sell off their investments en masse during times of uncertainty. This panic selling can lead to sharp declines in asset prices, even when there is no fundamental reason for such a drastic shift. Emotions like greed, fear, and overconfidence can cloud investors' judgment, causing them to make poor decisions that go against their long-term financial interests. This psychological bias can have a profound impact on the overall stability and efficiency of financial markets.- Individuals can strive to make more rational and informed choices that are aligned with their financial goals. Ultimately, being aware of psychological factors can help investors avoid falling prey to irrational exuberance or pessimism in the pursuit of financial success.
