The Role of Emotions in Investment

Decision-Making
Abdullah Alyousef

Investment decisions are characterized by both emotional and financial

consequences.
Different kinds of emotions, including disappointment, regrets, and pride,
tend to influence investors capacity to make investment decisions.
Emotions can hamper investors from using rational reasoning and logic,
thereby hindering the making of appropriate investment decisions.
For example, investors fears and emotional instabilities may lead to the making
of irrational investment options.

Key terms:
Affect- the feelings that psychologists and
economists have examined that play role in
decision making.
Misattribution bias- the background feeling, or
mood, that influences financial decision.

The different emotions that influence investment decision-making include,

fear of loss, risk aversion, bandwagon effect, greed, and fear of regret.
Emotions affect investment decisions based on the investors fear of losing
finances.
Some investors tend to demonstrate low levels of fear, while others are
significantly affected by investment fears.

Based on several psychological studies, investors tend avoid making

decisions that may lead to loss of money.
However, in other cases, investors are more likely to make investment
decisions aimed at increasing their revenues.
Investors are more likely to avoid purchasing investments that are
characterized by higher probability of financial loss.
For investors greed to supersede the fear of losing money, the possible
investment returns must be significantly higher than the expected losses.
As a result, the presence of greed tends to negate logical thinking, thereby
hindering effective making of investment choices.

Negative effect of emotions hinder investors from considering the

available information to make relevant investment decisions.
The effect of emotions in investment decision-making is evidenced when
investors engage in risk aversion.
Risk aversion entails the investors reluctance to select investments that
have unpredictable return rates.

This indicates that investors are likely to prefer investment options with
lower but certain rates of return.
For instance, investors who tend to avert risks are likely to invest in Guaranteed
Investment Certificate (GIC) or bonds, instead of investing in stocks, which may
have higher return rates.
However, in some cases, the investors greed may allow them to overcome the
risk-aversion emotions, thereby leading to making

The effect of emotions in investment decision-making is evidenced on how

emotional intelligence affects investors capacity to make appropriate
investment choices.

Emotional intelligence involves the ability to manage own emotions and

those of others.
Investors with higher emotional intelligence tend to prefer a balanced approach
to investment.
They avoid extreme investment decisions.
For example, higher emotional intelligence may result in a less than 50 percent
investment in equities.
With emotional intelligence, investors are able to avoid impulsiveness, which
contributes to inappropriate investment decisions.
As a result, the ability to control emotions allows investors to make the right
investment choices.

Investment decisions are characterized by both emotional and financial

consequences.
including disappointment, regrets, and pride, tend to influence investors
capacity to make investment decisions.

Emotions play a central role in determining the investors ability to make

appropriate investment decisions.
Investment decisions are normally based on different emotions, including
risk-aversion, greed, and fear of loss.
When making investment decisions, individuals tend to avoid investment
choices that are likely to bring about low returns with higher risks.
The relationship between emotions and investment is evidenced in the
manner in which emotional intelligence influences decision-making.
Investors with higher emotional intelligence are able to control their
emotions, thereby engaging in logical decision-making processes.

Question:

Emotional intelligence plays an important role when making

investment decisions.
Investors must control their emotions to avoid making
inappropriate investment decisions.
For instance, when making investment decisions, investors must
understand that a positive expected value (EV) indicates the
potential of generating returns from investments.
In addition, the self-awareness characterizing emotionally
intelligent investors allows them to make investments when returns
are higher while avoiding higher risks.
With emotional intelligence, investors are able to demonstrate
appropriate skills, such as adaptability , thereby responding to
market changes effectively.

Nofsinger John R. Psychology of Investing. 5th ed. Pearson

Education, 2013. Print.
Ricciardi, Victor. Investor Behavior: The Psychology of
Financial Planning and Investing. Hoboken, New Jersey:
John Wiley & Sons, 2014. Print.