Emotional Drivers of Financial Decision-Making: Unveiling the Link between Emotions and Stock Market Behavior

The assumption that investors are rational on the stock market is based on assumptions that have been widely criticized by behavioral finance. Behavioral finance has demonstrated the presence of behavioral and cognitive biases, as well as emotions, which may influence the judgment of stock market traders, particularly small investors unfamiliar with the financial markets. The aim of this article is to provide a framework for understanding the emotions felt by individual investors in a bearish stock market. For this purpose, we use experimental finance and methodological elements from qualitative research and, more specifically, the analysis of written documents. This method appears to be rarely used in academic studies, despite the fact that it allows us to get closer to the reality of human emotions and their mutual influence on decision-making. We analyzed the emotional patterns developed by eight students enrolled on a university management course who were asked to trade continuously for three days. At the end of these days, they wrote down in their own words (i.e. without the intervention of the organizers) everything they had felt during the experiment. Using reading guidelines from the literature on emotions, the different passages transcribed were analyzed to determine the corresponding emotion. Our results confirm the strong presence of negative emotions, which may have led to abandonment and withdrawal as time passed and the disappointments experienced. The results obtained are obviously strongly conditioned by the negative stock market context prevailing during the experiment. Our findings - even if they correspond to a particular context and a small sample size - could provide a useful reference for understanding how market sentiments could develop on a large scale.