The psychology of investors’ investment decision-making process: the role of emotion regulation and rumination in investment return

Au, Kah Mun (2023) The psychology of investors’ investment decision-making process: the role of emotion regulation and rumination in investment return. PhD thesis, University of Nottingham.

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Background The inefficiency of the financial market during the outbreak of Covid-19 was highly driven by market sentiment and behavioural bias. Clearly, the irrationality, sentimental and unpredictable financial market movements have repeatedly suggested that there are limitations and impractical applied theories to the existing financial models. Practitioners, regulators, investors, and academicians must be aware that the financial market performances are consequences of investors’ buying and selling decisions, and it is crucial to understand investors’ risk and return of the investment decision-making process to promote financial stability and make necessary adjustments accordingly in improving their financial models. Therefore, this study aims to contribute to the literature on the investors’ decision-making process from a psychological perspective. The objective is to explore the role of investors’ psychological traits, emotions, emotion regulation and affective forecast in the investment decision-making process.

Methods The study is split into three sub-sessions to verify (1) whether investors have the ability to forecast their affective response on their investment return, (2) whether investors’ risk decision is affected by their psychological traits, and lastly, (3) how investors’ emotions affect their investment return. To ensure that the experimental environment is closely representative of actual reality trading, the study uses a real-time virtual trading platform to measure participants’ emotions corresponding to their investment decisions. Participants are allocated with USD1million endowment and are allowed to plan their investment within the 500 stocks and futures from the US Stock Exchange in real-time prices.

Results The findings documented that participants were unable to accurately predict their emotions in both domains of loss and gain, specifically, they overestimated their level of happiness in a monetary gain and overrated sadness in a loss. Evidence revealed that sensation seeking was a significant factor in predicting investors’ risk decision, while participants with higher trait impulsiveness contributed to greater risk decision. It also confirmed that emotions had significant effects on investors’ portfolio return. Ruminated participants gained higher portfolio return by recognising their trading mistakes which aided in improving their trading skills. Furthermore, regretted participants with a high level of unpleasant emotions led them to further misjudgement and hence lower portfolio return. Lastly, the results suggested that emotion regulation was subjected to an individual’s ability, and poor emotion regulation could cause further irrational investment decisions.

Conclusion The research had made a substantial contribution in providing great insight into the role of psychological traits and emotions in the investment decision-making process. These factors contributed to the irrational behaviours that had deviated investors from their investment objectives. The actual experienced emotions were not anticipated by the investors, as shown in the inaccuracy of affective forecasting. Hence, it is recommended for investors to seek suitable emotional regulation strategies to reduce irrational investment behaviour, and to include additional measurements to improve their financial models.

Item Type: Thesis (University of Nottingham only) (PhD)
Supervisors: Tang, Kin Boon
Keywords: investment decision making process, heterogeneity, investor's traits, post-decisional emotions, experimental study
Subjects: H Social sciences > HG Finance
Faculties/Schools: University of Nottingham, Malaysia > Faculty of Arts and Social Sciences > Nottingham University Business School
Item ID: 72244
Depositing User: Au, Kah Mun
Date Deposited: 18 Feb 2023 04:40
Last Modified: 18 Feb 2023 04:40

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