Rationality vs emotions : what motivates individual investors make a choice?

Abstract

According to traditional financial theory, the market and its participants are rational „wealth maximizers” and emotions as well as other extraneous factors do not influence people when it comes to make a choices. However, the real market shows many examples then emotions and psychology influence people decisions, causing them to behave in unpredictable or irrational ways. These anomalies prompted academics to look to cognitive psychology to account for the irrational and illogical behaviors that modern finance had failed to explain. The real world setting implies dealing with an abundant complexity of financial markets, but modeling human behavior itself presents even greater challenge. Very often it is impossible to explain sudden changes of financial markets by rational behavior of its participants, which is based on information about the business, its changes, forecasts, etc. In the context of today global crises this tendency is even more evident, that is why behavioral financial models are very important scientific research object. The major problem is to examine whether rationality is still of prime importance making investment decisions and discuss the possibilities of influence of psychological factors on the financial market participants (investors): how and when they make decisions, make choices and cooperate? How do their understood values could influence market outcomes? These questions lead to one of the central puzzles: do investors make their decisions only rationally evaluating prons and corns? What could be additional motivation in decision making? Authors of the paper assume, that psychology of investment decisions are equally important and make an attempt to check this hypothesis through theoretical analyses of commonly used strategies of individuals behavior modeling.[...]