Social Influences in the Stock Market

For all its tangible and symbolic benefits, and although human motivation is complex, money plays a prominent role. For that reason, social psychologists are interested in how people make economic decisions, for example, when they invest in the stock market. The stock market can be remarkably volatile—surging up, plummeting down, and inching its way back up in ways that resemble a roller-coaster ride. Why does the market sometimes fluctuate so much? Today, some of the movement is caused by high-frequency trading, an automated system used by large investment banks and hedge funds in which computers are preprogrammed to transact very large orders, at high speeds, based on various price movements. This aspect of the market is captured in Michael Lewis’s (2015) best seller Flash Boys.

Moving from computers to people who make stock market decisions, we ask, Are the companies we invest in so unpredictable from day-to-day fundamental news, with fortunes ebbing and flowing on a quarterly basis, or are social psychological factors at work? To what extent are day-to-day price movements determined by rational economic indicators, such as the gross domestic product, interest rates, inflation, consumer confidence, employment statistics, industry trends, company-specific earnings, political uncertainty, and stock prices that are too high or too low and need correction? In contrast, to what extent is the stock market influenced by fear, greed, false beliefs, financial analysts who appear on TV, rumors that spread over the Internet, conformity pressures, and other social influences, all compounded by the speed and volume with which traders can buy and sell stocks online? In light of these various influences, the psychology of decision making in this high-stakes venue investing is both fascinating and complex.