What Does Matter in Economy Today: When Human Psychology Drives Financial Markets

Abstract

This paper provides the first evidence for empirical tests of the impact of rational expectations as well as behavioral biases, including among other animal spirits such as defined by Akerlof and Shiller on the variability of trading. Using a daily data for five international capital markets in developed countries, strong evidence is found. The hypothesis of rationality fails to determine the investors’ trading behavior. The economy is, however, driven by behavioral biases, including more especially animal spirits summarized in investors’ sentiments and beliefs.

Keywords

• Optimism
• Pessimism
• Spontaneous reaction
• Overconfidence
• Rationality
• Trading volume