Investor Psychology in Capital Markets: Evidence and Policy Implications

THE PSYCHOLOGY OF WORLD EQUITY MARKETS, Werner De Bondt, ed., Edward Elgar Publishing Ltd., July 2005

Journal of Monetary Economics, Vol. 49, No. 1, 2002

Posted: 1 Dec 2008

See all articles by Kent D. Daniel

Kent D. Daniel

Columbia University - Columbia Business School, Finance; National Bureau of Economic Research (NBER)

David A. Hirshleifer

Marshall School of Business, USC; National Bureau of Economic Research (NBER)

Siew Hong Teoh

UCLA Anderson School of Management

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Abstract

We review extensive evidence about how psychological biases affect investor behavior and prices. Systematic mispricing probably causes substantial resource misallocation. We argue that limited attention and overconfidence cause investor credulity about the strategic incentives of informed market participants. However, individuals as political participants remain subject to the biases and self-interest they exhibit in private settings. Indeed, correcting contemporaneous market pricing errors is probably not government's relative advantage. Government and private planners should establish rules and procedures ex ante to improve choices and efficiency, including disclosure, reporting, advertising, and default-option-setting regulations. Especially, government should avoid actions that exacerbate investor biases.

Suggested Citation

Daniel, Kent D. and Hirshleifer, David A. and Teoh, Siew Hong, Investor Psychology in Capital Markets: Evidence and Policy Implications. THE PSYCHOLOGY OF WORLD EQUITY MARKETS, Werner De Bondt, ed., Edward Elgar Publishing Ltd., July 2005, Journal of Monetary Economics, Vol. 49, No. 1, 2002, Available at SSRN: https://ssrn.com/abstract=1288973

Kent D. Daniel

Columbia University - Columbia Business School, Finance ( email )

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

David A. Hirshleifer (Contact Author)

Marshall School of Business, USC ( email )

Marshall School of Business
Los Angeles, CA 90089
United States

HOME PAGE: http://https://sites.uci.edu/dhirshle/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Siew Hong Teoh

UCLA Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

HOME PAGE: http://www.anderson.ucla.edu/faculty-and-research/accounting/faculty/teoh

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