39. That means that approximately 40 billion Dollars were floating around in the market on a single average day in the previous year. If you divide the US Gross Domestic Product of the same year (USD 10"442.1 billion) through 365, you get only 28.6 billion per diem. With regard to that, there is no question that stock markets have a big influence on our economy. As they are of such significance, it would be only logical that the individuals participating in trade there act on the base of rational, analytical thinking, rather than impulsively and randomly. Two researchers, however, found out that annualised returns at the NYSE were nearly three times higher on sunny days than on completely cloudy days. This suggests people tend to buy more shares when they are in good mood, for which nice weather can be a cause.
Prospect Theory.
Of course, this is a rather extreme example of how emotions are able to dominate over common sense. There are several theories concerning investor psychology which propose that individuals do not act necessarily irrationally when it comes to finances, but rather have certain tendencies distinguishing them from computers. One of them is the so-called "Prospect Theory" developed by Kahnemann and Tversky. It implies that people are hurt more by a loss than they are satisfied with a gain. Given the choice between $1000 for sure and 50% chance to get $2500, a majority of persons will decided to take the certain offer. This is called "risk-aversion". However, if they can select between losing $1000 and getting a 50% chance to lose $2500 or nothing, more people will go for the riskier option, which is referred to as "risk-seeking". Furthermore, Kahnemann and Tversky observed that people's subjective probability evaluations of certain cases differ highly from the real probability of each case. E.g., a group of 120 students at Stanford were asked what they think the most likely cause for their deaths would be.
