From the archives: The psychology of the stock market

'In March 1988, I had an article in The Psychologist on the psychology of the stock market. The 1980s were the 'loadsamoney' era and my interest in the stock market was triggered by winning £1,000 in a stock market competition. Not knowing much about the stock market at the time, I started to research how it operated and how people won or lost on the stock market.

Image

During this research, I came across the 'Efficient Markets Hypothesis'. People who play the stock market claim that they can identify undervalued companies and by buying shares in these companies early can later make a profit when they sell later as the value of the company increases. 

However, the efficient markets hypothesis suggests that because the markets are so efficient then shares are always priced accurately and therefore the identification and exploitation of undervalued shares is impossible.

Why then, from a psychological perspective, did investors continue to believe this was possible? My answer was in terms of Locus of Control theory and Self-Efficacy. Investors who believed they could exploit the market were high in internal locus of control and high in their belief that they had the knowledge and skills (self-efficacy) to be successful in the market.

The financial crisis in 2008 proved who was correct, and I went on to develop scales using locus of control and self-efficacy for use in education, computer use and internet skills.'

Dr Peter Eachus is a Chartered Psychologist and Associate Fellow of the BPS, at the University of Salford.

Visit The Psychologist archive to jump to any year and download edition PDFs as a BPS member.

We're always keen to hear your ideas for 'Looking Back' articles… Get in touch at [email protected] and explore past pieces.