Psychological influences on forecast bias: The impact of mood, depression, and trading performance on investor expectations

Understanding the relationship between psychological states and financial decision-making is crucial for a comprehensive view of investor behavior. This study examines how mood, depression, and trading performance influence forecast bias in stock market predictions. Drawing on fixed-effects regression models applied to panel data collected over three waves spanning nine months, the findings reveal that mood fluctuations and depressive symptoms systematically affect investors' return expectations. Specifically, the results show that investors experiencing a negative mood exhibit less optimistic bias in their forecasts of market returns over both the short term and the long term. Depressive symptoms, however, increase positive forecast bias for the long-term period, possibly reflecting compensatory optimism or altered risk perception during depressive episodes. Additionally, investors with stronger trading performance tend to express more optimistic forecasts, indicating a self-reinforcing bias linked to prior success. These results underscore the impact of emotional and cognitive factors, such as framing effects, overconfidence, and self-serving biases, on financial decision-making.