Psychological attributes of individual investors in finanical markets

Abstract

The aim of this thesis is to understand which psychological attributes are important in explaining investors observed behavior within the financial markets and the economy. The dataset used for most part of the thesis consists of UK based individual investors. This research involves analysis of investors selective attention to information conditional on the past stock market returns and investors’ personality trait of neuroticism. The study also includes cross-sectional analysis of investors’ portfolio performance, risk preferences and trading behavior and how these relate to various self-reported psychological attributes. Lastly this study explores the impact of arousal and psychological attributes on investors’ trading behavior within an experimental framework. Standard models of economics assume that individuals are omniscient rational utility maximizers with stable risk preferences and such models leave no room for individual differences and emotions. The results of the current research provide evidence that psychological attributes play an important role in financial decision making and account for significant variation in investors’ information acquisition decisions, frequency of trades, risk preferences and portfolio performance. The objective of this thesis is to contribute to the growing field of behavioral finance by providing a finer picture of investors’ behavior and by suggesting alternative explanations that better reflect the behavior of the agents that populate the real worl