Decision making in financial markets: What role do emotions play?

This research aims to explore the impact of emotions in trading and investing, an area which has increasingly gained popularity in recent years. Emotional factors like greed, anger, fear, and overconfidence are often believed to influence decision-making power of the investors yet the why remains poorly understood. This study touches upon how emotions affect investment choices, market fluctuations and broader financial landscape.
The primary question which this research attempts to answer is: How do emotions influence individuals and institutional trading and investing decisions? Additionally, this study also touches upon how specific emotional responses such as fear, or greed can affect the decision making and lead to financial downturns. The main hypothesis of this paper is that emotional regulation significantly shapes the investing behavior and thereby contribute to market inefficacies.
This research paper employs a mixed approach by extensively investigating various literatures and case studies to depict balanced viewpoints. While qualitative aspects will deal with examining incidents of the past, quantitative side will aim to showcase correlation analysis and discuss significance of loss aversion, regret aversion and overconfidence bias.
Although the research is still in progress, it is anticipated to conclude that emotions can significantly impacts traders' risk tolerance, lead to herd behavior, and cause deviations from rational decision-making. It is expected to find that emotions can cause a pronounced market fluctuations, which may not be entirely explained by traditional models. The findings will have important implications for developing strategies, better regulations and potentially influencing future investment decision practices.

Essay submission was presented at the New Westminster campus on April 10, 2025, for Student Research Days 2025.