Feeling Angry or Fearful? Then Don’t Call Your Stock Broker
- Investors’ emotions can influence their judgments and decision-making abilities.
- Those who respond to negative earnings reports with anger are more risk averse when it comes to their investments. They also do less background reading and have poor recall of what they’ve read. Those who respond with fear are more cautious, do more reading, and have better recall.
- People are influenced by forces they don’t always perceive. When receiving investment information as part of a Twitter feed, for example, they may respond positively or negatively to the information depending on the tone of what else is in that feed, and make decisions accordingly.
Michael Wynes was fully aware of the impact emotions could have on investing when he sat down at his computer to review his investment portfolio. It was 2013 and Wynes’s investments in Apple Inc. were on the rise. He was delighted that his initial $5,000 investment had grown to $25,000 in a matter of months.
Then a Master of Finance student at the University of Saskatchewan, Wynes knew better than to let his emotions get the better of him when it came to trading stocks. His research had informed him on the traps people can fall into when they let their feelings guide them. That’s why he had established a series of rules to guide his investment decisions – from only investing a certain amount in a particular portfolio to never doubling down on losses.
But one morning his own system let him down. Apple had issued a negative earnings report and things weren’t looking promising. “If I had followed my own rules, it would have been a case of that’s that,” he says. “I would have cut my losses. But I didn’t.”
Instead, Wynes admits that he put all his rules aside and kept trading, losing $20,000 in a couple of hours. “I let my emotions dictate my decisions,” he says.
Wynes had fallen into a common trap, responding to his investments with anxiety rather than logic, and making poor decisions as a result. Intrigued, he made the issue the focus of his doctoral research in accounting at Smith School of Business, under the supervision of Pamela Murphy.
Newsfeeds Emotionally Prime Investors
Wynes designed two studies that look at how emotions drive investors’ judgments and decision-making. In his first study, Wynes wanted to better understand how using social media to disseminate financial information about positive earnings impacts how investors receive that news.
According to previous research, the emotional tone of social media is contagious, meaning that people unconsciously adopt a positive or negative outlook, depending on the kind of content they’re absorbing in their feeds. With ever more companies disclosing earnings and making financial announcements using social media vehicles such as Twitter, Wynes was curious to know how investors’ reactions would be affected by the tone of the content it was surrounded by in a newsfeed.
He recruited more than 280 volunteers and offered them the opportunity to invest in a company before asking them to rate how attractive they found that investment. Wynes provided background information on the firm, including prior earnings performance, before asking them to make that initial attractiveness judgment. He then had each person read a series of tweets unrelated to the firm that were either positive, negative, or neutral in nature before presenting them with a positive earnings statement with news about the company they had ‘invested’ in, measuring how affected they were by that statement.
Although everyone had received the same positive news about their investments, their responses differed based on how they had been primed through reading tweets. Wynes found that when compared with those who had read the neutral tweets, those who had read negative tweets were less inclined to view the company favourably.
“Reading that content makes you feel a bit more negative, so that’s pulling you away from how attractive you find the firm,” he explains. Surprisingly, those who read positive tweets were also less inclined to view the company favourably, although to a lesser degree than those who read negative tweets.
People who were angry as a result of bad news became more risk averse
In his second study, Wynes sought to investigate the impact of specific emotions – anger and fear – on investor decision-making, as well as on investor ability to search for and process information.
He recruited 301 volunteers, giving them an allocated amount of money and then allowing them to invest in the stock of a company (a high-risk investment) or government bond (a low-risk investment). He then presented them with one of two press releases announcing bad news from the company in whom they had invested. In both cases, the company announced negative earnings, but in one case it attributed the losses to bad management — an internal error that could have been prevented by management — while the second blamed the government for the bad returns.
Wynes found that when people learned they had lost money due to internal error, they reacted with anger. But while he expected those who were angry to take more risks as a result, he found the opposite: instead, they were more risk averse.
Wynes also found that angry investors were also inclined to do less background reading and could recall less about what they had read. Fearful investors, on the other hand, read all materials carefully and retained more of what they had read.
The Value of Emotional Intelligence
Wynes stresses the importance of being conscious that your emotions are constantly being primed by what you’re reading online. People receiving their financial updates via Facebook or Twitter, which is becoming more common, need to be particularly alert as their judgments may be affected by what else they are reading online.
Both anger and fear will result in different investor outcomes. Savvy investors will want to check in with their emotions before making important decisions. Those who notice that they’re feeling angry, in particular, will want to take care to read and absorb materials properly.
“Those people who have elevated levels of emotional intelligence are better able to avoid being influenced by what they’re reading – so that’s worth keeping in mind,” says Wynes. “I also think companies can help by issuing statements to remind their clients they could be influenced by the context in which they are reading that material.”