Taming the Animal Spirits: Predicting Psychologically Based Stock Price Movements

Abstract

Abstract This paper is concerned with the psychological and social factors that may be used in the prediction of stock prices using artificial intelligence (AI). Examples of price movements that appear to be affected by such factors are drawn from market behavior during the Covid-19 pandemic. A review of the main effects attributable to psychological mechanisms follows: the disposition effect, momentum, and the response to information. These effects are explained by reference to regression to the mean, negativity bias, the availability mechanism, and information diffusion. Drawing on the consumer behaviour literature, we identify factors that are likely to indicate psychologically based price effects and suggest two new measures: changes in the proportion of new investors and the volume of publicity/word of mouth in relation to a firm’s capitalization.