Huntsman School Research Reveals How Investor Mood Shapes Market Behavior
Huntsman School Research Reveals How Investor Mood Shapes Market Behavior
LOGAN, Utah — Research from faculty at the Jon M. Huntsman School of Business at Utah State University sheds light on a subtle but powerful force in financial markets: investor mood.
In a study published in the Journal of Business Finance & Accounting, Huntsman faculty Devon Erickson, Lynn Rees, and Jayson Talakai, alongside Kevin H. Kim of KAIST, examine how investor sentiment influences how investors gather and process information.
When market sentiment is low and investors feel uncertain, they tend to dig deeper, reviewing detailed, complex financial disclosures like SEC filings. But when optimism is high, that effort drops off. Investors are more likely to rely on quick, high-level information such as stock charts or summary data instead of doing the deeper analytical work.
Using data on investor activity such as downloads of SEC filings and search behavior around major corporate events like earnings announcements the researchers found a clear pattern:
- Low sentiment → more detailed analysis
- High sentiment → more shortcuts and surface-level review
In other words, when markets feel risky, investors behave more carefully. When things feel good, they tend to assume less risk and put in less effort.
The research also shows that certain events like a major earnings surprise or signs of financial distress can override sentiment and push investors back toward deeper analysis, regardless of the broader market mood.
The study highlights an important distinction between types of investors.
While both professional and individual investors are influenced by sentiment, retail investors are significantly more likely to rely on shortcuts during optimistic periods. Institutional investors, by comparison, are less affected and more consistent in their information-gathering behavior.
When investors rely less on detailed information during high-sentiment periods, prices are more likely to reflect incomplete or simplified analysis, creating greater potential for mispricing.
The study offers a new explanation for a long-observed phenomenon in finance: why markets can become overly optimistic or disconnected from fundamentals during boom periods.
While prior research has shown that sentiment influences stock returns, this study is among the first to demonstrate how it affects the decision-making process itself, particularly the effort investors put into understanding a company’s fundamentals.
The findings bridge insights from finance and psychology, showing that investor behavior is shaped not only by data, but by perception, mood, and cognitive effort.
Full paper: https://doi.org/10.1111/jbfa.12868