Keeping information is a hard thing to do nowadays, mostly because of the development of communication and informational technology. An individual can hardly administer the huge amount of information he’s being bombarded with and that exceed his capacityinvestor’s attitude, investing strategy, informational asymmetry, capital market.

Barna Flavia

Danuletiu Adina Elena

Mura Petru Ovidiu

English

Research Papers in Economics

474 
 
ROLE OF INFORMATION IN ADOPTION OF INVESTMENT DECISIONS ON 
CAPITAL MARKET 
 
Barna Flavia 
West University from Timi oara, Romania Faculty of Economics and Business Administration 
flavia.barna@feaa.uvt.ro 
Dănule iu Adina Elena 
University  1st  of  December  1918,  Alba  Iulia,  Romania  Faculty  of  Sciences  
adina.danuletiu@gmail.com 
Mura Ovidiu 
West University from Timi oara, Romania Faculty of Economics and Business Administration 
ovidiu.mura@feaa.uvt.ro 
 
Keeping information is a hard thing to do nowadays, mostly because of the development of communication 
and informational technology. An individual can hardly administer the huge amount of information he’s 
being bombarded with and that exceed his capacity of rational analysis. The limited attention, memory and 
the abilities to process information force people to focus their attention on certain information. The linear 
thinking  risk  in  investment  is  due  to  the  exaggerated  attention  given  to  the  short  term  performances, 
regardless whether we’re talking about a good or bad evolution. The causes of psychological nature may 
influence the behavior of rational investor when taking the decision, being necessary for the investor to 
make  a  difference  between  facts  and  opinion,  between  information  and  gossip,  between  reality  and 
appearance. 
 
Keywords: investor’s attitude, investing strategy, informational asymmetry, capital market. 
 
JEL Classification: G11, G12, G14 
 
1. Introduction 
The  capital  market’s  evolutions  are  influenced  by  the  information’  existence.  Information  is 
definitely a rare good, which has an essential role in performing financial operations. Having 
information before everyone else can generate important gains. This thesis is proved by many 
examples when people got rich because they were the first to have certain information. 
Keeping information is a hard thing to do nowadays, mostly because of the development of 
communication and informational technology. Relevant market information is incorporated in the 
price almost instantly, so that only the first one who triggers the operation based upon it is the 
fully beneficiary of its effects. Accessing information generates interesting psychological effects. 
In this paper, we’ll analyze the importance of information for the investors’ attitude on the capital 
market and it’s impact over the investing decision on the capital market. 
 
2. Empirical evidence 
An individual can hardly administer the huge amount of information he’s being bombarded with 
and that exceed his capacity of rational analysis. The supplement of information does not always 
generate  a  surplus  of  psychological  comfort  and  a  higher  efficiency  of  the  investment. 
Nevertheless, the huge amount of information available in real time creates the impression of 
understanding and controlling the micro variations of the capital market. But only the capital 
market’s specialists can understand and use the capital market’s micro variations, succeeding this 
way to anticipate the other investors’ actions.  
On one hand, the investor is constantly seeking for information and on the other hand he is 
incapable  of  processing  infinite  number  of  information  he’s  being  bombarded  with.  This 
investor’s  difficulty  triggers  a  mental  saving  process  and  also  an  information  selecting  and 475 
 
simplifying process, conditioned by his own expectations. The financial instruments that have 
brought satisfaction in the past are most often positively valued. 
The limited attention, memory and the abilities to process information force people to focus their 
attention on certain information. The links created at the subconsciously level also creates a 
selective focus. Many studies proved that additional verbal information influence the decision 
process. 
The selective associations lead to availability effects (Kahneman  i Tversky). An informational 
signal is significant when it can captivate attention or it can generate associations which make 
recalling easier. According to the availability theory (Kahneman  i Tversky), the most common 
things are the easiest to recall. This is normal, since the common situations are the most often 
observed and reported ones, and so their remembering is the easiest. 
People  are influenced by the way of formulating the problems because they can’t select perfectly 
the  relevant  information  from  their  memory.  They  underestimate  the  situations  that  aren’t 
available in an explicit way. This suggests a form of overconfidence and also an overreaction of 
the market during the mnifestation of these unpredictible situations. 
The halo effect (Nisbett  i Wilson) leads to the extension of a favorable evaluation which is made 
by  an  individual  over  a  certain  person  or  situation,  having  just  one  significant  piece  of 
information. When you compare, you can see that a subtle prejudice belonging to thi cathegory 
can lead to the wrong price establishment on the capital market. On an efficient market, the fact 
that a stock is valuable (this is because in the future it is thought that the stock’s price will rise) 
doesn’t  give  you  any  information  regarding  the  yield’s  adjustments to  future potential risks, 
which are considered nul. If people extend their favorable evaluation (based on present results) 
over the future evolutions, the rising stocks will be overestimated (Shefrin  i Statman). 
The linear thinking risk in investment is due to the exaggerated attention given to the short term 
performances, regardless whether we’re talking about a good or bad evolution. 
An example of linear thinking is the rise and fall of the technology and telecommunication field 
in U.S.A, during the past ten years. A relevant index for the technology and telecommunication 
field is the NASDAQ Index. During three consecutive years (March 1997 – March 2000), the 
NASDAQ  Index  recorded  an  incredible  value  of  79,4%.  Thinking  that  this  trend  will  also 
continue  in  the  future,  many  investors  were  deceived  and  they  didn’t  manage  to  obtain  the 
expected return; this happened because they addressed  the investment in a linear way. 
How  does  information  influence  the  investing  decision  during  a  financial  crisis?  Empirical 
evidence proved that every economical crisis is preceded by several Stock exchange decreases 
and every stock exchange decrease cycle is accompanied by short term increase periods. In order 
to  prove  this,  we  selected  the  Dow  Jones  Indus.  Avg.  Index  graphic  during  the  U.S.A.’s 
recession, recession that is often compared to the present financial crisis. During almost three 
years of decrease, there were six increase intermediate trends. These trends lasted between a 
month and a half and five months, and the increases were from 12% to 45% for each such period 
(se the 1st Graphic). What is the explanation for this investing behaviour? The investors have a 
different attitude towards the risk and perceive in a different way the available information on the 
capital market. 
 
 476 
 
 
Graphic no. 1. DJIA Index evolution during 1928 -1933 
Source: www.kmarket.ro 
 
The  behavior  and  opinions  of  capital  market’s  investors  have  an  essential  influence  on  the 
individual’s behavior and opinions, especially during an uncertainty period. In the small size 
investor’s case, the fear of a loss can substitute their rationality. 
Andreassen and Kraus (1990) noticed that, when exogenous prices fluctuate modestly on an 
experimental  market,  the  subjects  buy  when  prices  are  decreasing  and  sell  when  prices  are 
increasing. When a trend appears, the subjects are no longer following the previous pattern, but 
the trend. This reflects itself also on the real markets. Different empirical studies conclude that 
the assets’ prices are more or less sensitive to novelties. Cutler, Poterba and Simmons (1991) 
studied different markets between the years of 1960-1988.  
Jegadeesh and Titman’s researches suggest a late reaction model: during a given period, the 
winning stocks’ income surpasses the loser stocks’ income. De Bondt and Thaler show that the 
situation is reversing itself on long term.  
Kaminsky and Schmukler (1999) studied the investors’ reaction to news during the Asian crisis 
(1997-1998). They observed the first twenty daily fluctuations and concluded that their causes 
aren’t political or economical news. Kaminsky and Schmukler also deduced that the course’s 
fluctuation is stronger as the crisis gets bigger and during times like these, the stocks’ price is 
more influenced by the negative than the positive news. 
Resembling with the primitive behavior, when seeing everyone around running, the first impulse 
is to follow them, the investors’ behavior can cause a real mass hysteria and the individual’s 477 
 
personality completely vanishes (you can talk about primary emotionality). These extreme forms 
may lead to destructive results and to the stock exchange’s collapse. (Ghosh and Ray, 2002).  
Emotions play an important role in rational considerations regarding risk or time preference. 
Ellsberg’s paradox (1961) shows that people have dislike towards ambiguity and this leads to 
irrational decisions. Dislike towards ambiguity has been confirmed by experimental market’s 
tests. According to Camerer (1995), the dislike towards ambiguity can increase unduly the risk 
bonus when new financial markets appear, mostly due to the fact that there  are uncertainties 
about  the  economic  environment  and  potential  results.  A  possible  explanation  of  the  dislike 
towards ambiguity the obvious lack of an identifiable parameter of the decision problem, which 
can be taken as a higher risk.  
The dislike towards risk, regret and loss shows a premeditated avoidance of unpleasant future 
feelings. But still, people’s present feelings affect the perception and choices made regarding the 
taken risk. For example, the Lotto sales in the state of Ohio were higher during the days that 
followed the victory of Ohio State University (Arkes, Herren and Isen, 1988). 
In general, people who have a positive state of mind are more optimistic about the election and 
judgments that they make instead of those who have a bad state of mind. Negative states of mind 
are  associated  with  detailed  and  critical  analysis  strategies  of  information.  Emotional  states 
contain  information  that  individuals  can  use  in  building  its  image  about  the  environment. 
However, people often attribute feelings to the wrong source, leading to erroneous judgments. 
While  economists  studied  individual’s  psychology,  social  psychology  didn’t  receive  such 
attention. The conversation is essential in broadcasting the popular ideas about financial markets 
(Shiller, 2000). In an individual investors study, Shiller noticed that almost every investor who 
had recently purchased stocks, have drawn attention through direct interactive communication. 
Humans have a limited attention and tend to focus on the ideas and the facts that are brought by 
conversation, rituals and symbols. As a result, the cultural element becomes determinant for 
behavior. 
On the capital markets, information is transmitted in cascade, causing a large dimensions group 
behavior. Shiller believes that a certain level of the market’s quotations isn’t the result of single 
made valuations, but rather the result of collective behavior.  
The collective behavior is caused by the fact that individuals decide not to waste time and energy 
in  order  to  identify  the  real  market  value  of  an  instrument;  they  give  up  this  way  on  the 
possibility to produce an independent impact on that instrument and adapt to the trend. This type 
of behavior contradicts the expected utility theory: one investor’s behavior is independent from 
the others’ choices, because it has it’s own utility function. This way, the collective investing 
behavior is more likely to be influenced by the information trade between the individuals. 
When uncertain, the individual’s opinions tend to be strongly influenced by the group’s behavior 
and opinions. The market is therefore influenced by a group behavior that is different from the 
sum of individual behaviors. 
The collective compliance of the investors is counterproductive, because the uncertainty makes 
the investors look for market information in the media (profile newspapers, TV shows), without 
checking the exacted and quality of received information. It matters more who says it and not 
what it is being said. This happens because there is a need of identifying a leader, a market 
„guru”, whose behavior can be imitated. 
These leaders are so worshiped that they tend to become „gods” in the collective imaginary. The 
mortals, incapable of making their own choices, expect the „gods” to always make the right 
decisions.  An  example  this  way  is  Warren  Buffet,  who  through  his  opinions  moves  the 
beverage’s world. His declarations are seen as an anticipation of the future because, being in 
front, he’s thought to hold information that mortal don’t. 
Often, the investors’ losses are caused by their subjective decisions. The reason why problems 
occur on the stock exchange is that they are addicted to the other investors. Thus, the investors 478 
 
often give up their own strategies and prefer following the path that the others have chosen. 
According to behavioral finance, the less an investor knows, the easier is for him to be affected 
by the „group mentality”. The less experience investors have, the sooner they panic. 
 
3. Conclusions 
Investors may be rational or not taking a decision on the capital market, which is reflected in the 
prices of financial instruments which may fluctuate, depending on either financial circumstances 
or in light of the interests of investors, oscillating between collective hysteria and indifference. 
Attempts by individual investors to be rational can sometimes seem downright absurd.  
Macroeconomic  forecasts  are  usually  incomplete  to  have  any  value  for  small  investors, 
particularly when economic development is influenced by small details, but fundamental, that 
nobody could forecast.  
The causes of psychological nature may influence the behavior of rational investor when taking 
the decision, being necessary for the investor to make a difference between facts and opinion, 
between information and gossip, between reality and appearance. 
 
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Conversation, information, and herd behavior,

Does the stock market overreact?”,

Evidence of predictable behaviour of security returns”,

Further evidence on investor overreaction and stock market seasonality”,

Herd Behavior and Investment, The American Economic Review,

How distance, language, and culture influence stockholdings and trades,

Investor psychology and security market under- and overreactions,

Investor psychology in capital markets: Evidence and policy implications, Working paper,

Irrational Exuberance

Judgemental extrapolation and the salience of change,

Mean reversion in stock prices: evidence and implications”,

On the psychology of prediction,

On the reality of cognitive illusions: A reply to Gigerenzer’s critique,

Overreaction, delayed reaction, and contrarian profits”,

Prospect theory: An analysis of decision under risk,

R.,1995, Momentum investment strategies, portfolio performance, and herding: A study of mutual fund behavior,

Speculative dynamics and the role of feedback traders,

Speculative dynamics,

Telling more than we can know: Verbal reports on mental processes,

The investment behavior and performance of various investor types: A study of Finland’s unique data set,

The psychology of preferences,

What makes investors trade?

What moves stock prices?

ROLE OF INFORMATION IN ADOPTION OF INVESTMENT DECISIONS ON CAPITAL MARKET

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ROLE OF INFORMATION IN ADOPTION OF INVESTMENT DECISIONS ON CAPITAL MARKET

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