The Psychology of Trading and Investing

In contrast to the assumption of standard economic theories, human beings cannot always make rational investment and trading decisions. Thus, psychological explanations are needed to shed light on the complexity of actual decision‐making processes. The purpose of this chapter is to provide an overview of relevant psychological perspectives to explain trading and investment decisions. Starting on the individual level, the chapter examines how personality, mood, affect, and cognitive biases shape investment and trading decisions. Next, the chapter moves to the societal level and discusses how herding, social norms, cultural norms, and ethics play a role in financial decisions. Finally, the chapter shows how news, rumors, and market mood influence trading behavior on the macro level.