Do emotions Affect the Stock Market?

do emotions affect the stock market?

Do emotions affect the markets?

Do emotions affect the stock market? This is an argument that is old as the markets themselves, and no conclusive answer has ever been reached. Many claim that exuberance or panic can cause markets to rise or fall, but how much do these emotions really affect stock prices?

In Favor of Emotions

Those in the camp who claim that emotions can impact stock prices say that emotions manifest themselves as either exuberance or panic. Either one equates to irrationality and will move the markets too high or too low.

Economist Irving Fisher argued that the market crash of 1929 was caused by panic. He said that corporate earnings and other economic factors justified the current market prices. He claimed that when the market started to fall investors panicked. They sold their positions, which caused others to panic and also sell. Throughout all of this, Fisher said that underlying economic conditions had not changed. Investors must have panicked and caused a crash.

In Favor of Efficient Markets

In the 1960’s there rose a new hypothesis that claimed that markets were efficient, and that they were priced according to their underlying assets. Changes only occurred because of new information becoming available.

Scholars who subscribe to this philosophy believe that there was no bubble in 1929. The market fell because investors were reacting to new information. The information of the day was pointing to a recession.

Some Final Thoughts

Do emotions affect the stock market? This debate has raged since there were markets, and no clear winner has ever been declared.

Many believe that emotions can distort markets but not exclusively. Many other factors are usually at play. To believe that emotions affect the markets is to believe that emotions are irrational. As more experts weigh in however, our understanding of emotions continues to evolve. It is a belief that emotions are in fact rational, and that logic and reason depend on our emotions.

So, are emotions affecting the markets? If so, are they exclusive or part of a larger picture? Are the markets in fact efficient and only changing based on information? Finally, are human emotions irrational or rational? What do you think? Share in the comments below.

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