investor psychology, markets, investment, market information
The full arrival of the information age, transported through the medium of the internet, provides the individual investor with quicker access to more information than ever before. Economic theory tells us that greater transparency in investment decisions should make for more efficient financial markets; i.e. smaller deviations of security prices from their "true" or intrinsic values. However, recent evidence based in US stock market performance suggests that the vastly improved information flow may cause investors to act in a less rational manner, leading to greater market volatility and less efficient financial markets. The argument that information technology (IT) provides the average investor with greater transparency in decision-making is a compelling one. With greater transparency, more information will be more available to more investors, leading to improved price discovery among professional investors. In turn, non-professional investors will be able to obtain a better price (Pagano and Roell, 1996). In concert, the internet, personal computers, discount brokers, and tighter SEC regulations on equitable disclosure make securities markets more transparent. IT provides free access to all public information and offers investors a larger store of information than was historically provided via the print media. Pagano and Roell (1996) also propose that expected trading costs to investors decline as a market becomes more transparent, which further levels the playing field for non-professional traders. However, it is the nexus between more perfect information and investor psychology which may provide at least a partial explanation for recent heightened volatility in the US stock market (Evidence the reduction of the Nasdaq composite index from 5200 in March 2000 to 1300 in July 2002 and the deflation of the DJIA from 10,500 in February 2002 to nearly 7500 in July 2002). The paper will examine the links between more perfect information, investor psychology, and market volatility and, as a bromide, suggest that foreign investment comprise a part of one's portfolio.
Department of Economics, South Dakota State University
Number of Pages
Sondey, John and Jacobson, Tony, "Irrational Markets, Irrational Investors: the Foreign Card" (2003). Economics Staff Paper Series. 166.