A kinetic description of the impact of agent competence and psychological factors on investment decision-making

Abstract

The kinetic theory is employed to analyze influence of agent competence and psychological factors on investment decision-making. We assume that the wealth held by agents in the financial market is non-negative, and agents set their own investment strategies. The herding behavior is considered when analyzing the impact of an agent’s psychological factors on investment decision-making. A nonlinear Boltzmann model containing herding behavior, agent competence and irrational behavior is employed to investigate investment decision-making. To characterize the agent’s irrational behavior, we utilize a value function which includes current and ideal-investment decisions to describe the agent’s irrational behavior. Employing the asymptotic procedure, we obtain the Fokker–Planck equation from the Boltzmann equation. Numerical results and the stationary solution of the obtained Fokker–Planck equation illustrate how herding behavior, agent competence, psychological factors, and irrational behavior affect investment decision-making, i.e., herding behavior has both advantages and disadvantages for investment decision-making, and the agent’s competence to invest helps the agent to increase income and to reduce loss.