This study investigates the impacts of behavioral finance on stock market volatility. The primary aims are to explain the reasons behind changes in the S&P 500 price within the context of behavioral finance and to analyze investor behavior in response to these changes. To achieve this, the research employs time-series analysis over a 10-year period, focusing on the S&P 500, real interest rates, consumer confidence, market volatility and credit default swaps while considering the effects of behavioral biases. The findings reveal several significant correlations: rising real interest rates negatively affect stocks due to loss aversion and sentiment. Conversely, higher consumer confidence tends to positively influence the stock market, driven by herding behavior and optimism. Additionally, market volatility shows a negative correlation with the S&P 500, influenced by risk aversion, recency bias and herding behavior. Moreover, an increase in credit default swap rates leads to stock market declines, primarily influenced by risk perception, loss aversion and herding behavior.

To study the effect of cognitive reflection on behavioral anomalies, we used the cognitive reflection test to measure cognitive reflection. The study was conducted on 395 Iranian university students and shows that subjects with lower cognitive reflection are significantly more likely to exhibit the conjunction fallacy, illusion of control, overconfidence, base rate fallacy, and conservatism. In addition, test scores are correlated with risk preferences. The results do not show any relationship between cognitive reflection and self-serving bias or status quo bias. We also find that gender is significantly related to illusion of control and self-serving bias.

In four experiments we showed that investors are not only interested in maximizing returns but have non-financial goals, too. We considered what drives the decision to invest ethically and the impact this strategy has on people’s evaluation of investment performance. In Study 1, participants who chose a moral portfolio (over an immoral one) reported being less interested in maximizing their gains and more interested in being true to their moral values. These participants also reported feeling lower disappointment upon learning that a different decision could have yield a better outcome. In Studies 2 and 3, we replicated these findings when investors decided not to invest in immoral assets, rather than when they choose to invest morally. In Study 4, we found similar results using the same industrial sector in both the moral and the immoral conditions and providing participants with information about the expected return of the portfolio they were presented with. These findings lend empirical support to the conclusion that investors have both utilitarian (financial) goals and expressive (non-financial) ones and show how non-financial motivations can influence the reaction to unsatisfactory investment performance.

This paper experimentally investigates a well-known anomaly in portfolio management, i.e., the fact that paper losses are realized less than paper gains (disposition effect). I confirm the existence of the disposition effect in a simple risky task in which choices are taken sequentially. However, when choices are planned ahead and a contingent plan is defined, a reversal in the disposition effect is observed.

We use the returns on lottery-like stocks and a dynamic factor model to construct a novel index of investor sentiment. This new measure is highly correlated with other behavioral indicators, but more closely tracks speculative episodes. Our main new finding is that the effects of sentiment are asymmetric: During peak-to-trough periods of investor sentiment (sentiment contractions), high sentiment predicts low future returns for the cross section of speculative stocks and for the market overall, whereas the relationship between sentiment and future returns is positive but relatively weak during trough-to-peak episodes (sentiment expansions). Overall, these results match theories and anecdotal accounts of investor sentiment.

Plan knowledge and trust in financial institutions – two variables missing from standard neoclassical or behavioral models of decision-making – are strongly correlated to 401(k) savings behavior based on results from this paper. In voluntary enrollment settings, plan knowledge and demographic characteristics are related to participation in a 401(k) plan. In automatic enrollment settings, trust in financial institutions and knowledge of an available plan match are related to participation. Although this study cannot prove causality of the relationships, it does extend our understanding of the complex factors underlying savings choices. Policy implications are discussed.