3.9.5. The Media

Media may well have an important role in directing this public attention toward markets, which may consequently result in abnormal market behavior. Stock-market price increases generate news stories, which generate further stories about new-era theories that explain the price increases, which, in turn, generate more news stories about the price increases (Shiller 2002). In the United Kingdom, Diacon (2004) found that lay investors perceive higher risks in investing in financial services products than do their financial advisers (coupled with an inherent optimism about likely benefits) has substantial ramifications in the light of recent reports, such as the "Sandler Review". This may have the e ffect of encouraging consumers to deal directly with providers rather than via independent financial advisers.

Dispensing with the services of financial advisers is likely to lead consumers to make more conservative investment choices: for example, by investing too little in equities and too much in fixed-income assets when saving retirement. As a result, consumers may find themselves with surprisingly inadequate levels of savings to meet future commitments such as a pension on retirement. Hon (2013b) studied the investment attitude and behavior of the small investors on derivatives markets in Hong Kong. He found that the most decisive factor that could influence small investor's decision making is highly accessible and updated. In total, 37.8% and 25.8% of respondents considered the Internet and news/magazines/newspaper, respectively, as the decisive factor.

#### 3.9.6. Emotions and Sentiments

There are serious questions concerning whether the phenomenon on excess volatility exists in the first place and, and if it does, whether abandonment of assumptions of rational expectations in favor of assumptions of mass psychology and fads as primary determinants of price changes is the best avenue for current research (Kleidon 1986). Using common sense, one knows that the stock market could repeat the performance of recent years. That possibility seems quite real, just as real as the possibility of a major correction in the market. The question is how the private investor feels when he fills out his choice of mutual funds for his retirement scheme. How this person feels depends on his experiences in investing.

If one has been out of the market without participating in earning money that other investors may have done, one may be feeling a sharp pain of regret. Regret has been found by psychologists to be one of the strongest motivations to make a change in something. Envy is another dominant characteristic: To see other people having made more money in the stock market than oneself has made from work is a painful experience, especially since it diminishes one's ego. In case the other people were smarter, one feels like a fool, and even if they were not any smarter, just lucky, it may not feel any better.

A common feeling in this situation is that if one can participate just one more year in rising stock market everything will be much better and mitigate the pain. One may also think that the potential loss will be much more diminishing to one's ego than the failure to participate has already been. One may also realize that one takes the risk of entering the market just as it begins a downward turn. However, the psychological cost of such a potential future loss may not be so much greater relative to the very real regre<sup>t</sup> of having been out of the market in the past.

Barberis et al. (1998) presented a parsimonious model of investor sentiment, or of how investors form expectations of future earnings. The model they proposed was motivated by a variety of psychological evidence; in making forecasts, people pay too much attention to the strength of the evidence they are presented with and too little attention to its statistical weight. Loewenstein et al. (2001) proposed an alternative theoretical perspective, the risk-as-feelings hypothesis, which highlights the role of a ffect experienced at the precise moment of decision-making. Drawing on research from clinical, physiological, and other subfield of psychology, they showed that emotional reactions to risky situations often diverge from cognitive assessments of those risks. When such divergence occurs, emotional reactions often drive behavior. The risk-as-feelings hypothesis is shown to explain a wide range of phenomena that have resisted interpretation in cognitive–consequentialist terms.

If one participates in the market today for a while and ponders whether ge<sup>t</sup> out or not, he has a fundamentally di fferent emotional frame of mind. This person feels satisfaction and probably pride in his past successes, and he will certainly feel wealthier. One may feel as gamblers do after they have "hit big-time", i.e., that one is gambling with the "house money", and therefore has nothing to lose emotionally by wagering again. The concept of gambling with the house money is a theory about people's risk preferences and is related to mental accounting. Investors will generally become more risk-averse in the case of prior losses and less risk-averse in the case of prior gain (Barberis and Thaler 2003); they will also take greater risks as their profits grow.

This provides support for the notion that successful traders are more likely to be overconfident. The emotional state of investors when they decide on their investment is no doubt one of the most important factors causing bull market. From the neuroscience literature, Peterson (2002) demonstrated correlations between reward anticipation and the arousal of a ffect (feelings, emotions, moods, attitudes, and preferences). He briefly outlined an investment strategy for exploiting the event-related security-price pattern described by the trading strategy "buy on the rumor and sell on the news".

In their research, Chow et al. (2015) conducted a survey to examine whether the theory developed in Lam et al. (2010, 2012) and Guo et al. (2017a) holds empirically, by studying the behavior of di fferent types of Hong Kong small investors in their investment, especially during financial crisis. They found that determinants of the Hong Kong small investors' investment decision have uniform views as to the

ascending order of importance of time horizon, sentiment, and risk tolerance. Time horizon is the least important factor, and risk tolerance is the most important factor.
