Influence of Emotion and Mood

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"Studies by psychologists have found that mood appears to affect predictions about the future. People in a good mood are more optimistic about the future than people in a bad mood (Wright and Bower, 1992). The impact
of mood on financial decisions has been referred to as the “misattribution bias” (Nofsinger, 2005). If a person is
in a good mood, they will have a tendency to be optimistic when evaluating an investment. Good moods may
cause people to be more likely to take risky investments (for example choosing stocks rather than bonds).
Nofsinger (2002) has suggested an optimism bias. Optimism reduces critical analysis during the investment
process and causes investors to ignore negative information. Furthermore, mood affects investment behaviour
(Baker and Nofsinger, 2002; Nofsinger, 2002). It has been suggested that good moods make people less critical.
Good moods can lead to decisions that lack detailed analysis.
People transmit moods to one another when interacting socially. People not only receive information and
opinions in the process of social interaction, they also receive moods and emotions. Moods and emotions
interact with cognitive processes when people make decisions. There are times when such feelings can be
particularly important, such as in periods of uncertainty and when the decision is very complex. Moods and
emotions may be unrelated to a decision, but nonetheless affect the decision. Moods and motives produced by
spiritual factors will affect individual decisions. The general level of optimism or pessimism in society will
influence individuals and their decisions, including their financial decisions.
There is a distinction between emotions and moods. Emotions are often short term and tend to be related to a
particular person, object or situation. Moods are free-floating and not attached to something specific. A mood
is a general state of mind and can persist for long periods. Mood may have no particular causal stimulus and
have no particular target.
A positive mood is accompanied by emotions such as optimism, happiness and hope. These feelings can
become extreme and result in euphoria. A negative mood is associated with emotions such as fear, pessimism
and antagonism. Nofsinger (2005) suggested that social mood is quickly reflected in the stock market, such that
the stock market becomes an indicator of social mood. Prechter (1999), in proposing a socio-economic
hypothesis, argued that moods cause financial market trends and contribute to a tendency for investors to act
in a concerted manner and to exhibit herding behaviour."

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