The Influence Of Stock Market Investors’ Behavior On Business Cycles

Within the economic literature, the idea that the fluctuations of economy, at a macroeconomic level, are due to psychological factors that affect population, are more and more present and debated. These psychological factors that determine people’s day by day economic actions have been analyzed by psychologists as well as by economists, within high impact studies, both practical and theoretical, and were able to provide with valid explanations on how the evolution of an economy is strongly dependent on its participants states of mind. This paper attempts to show how people’s behavior influences the evolution of an economy at a global level, by taking into consideration existing theories and important papers on this subject on the one hand and by proposing new explanations on how a manipulated investment behavior will dramatically affect the welfare of an economy, on the other hand. The reasoning exposed within this paper shows how investment behavior of individuals, especially of the ones acting within stock markets, determines the succession of business cycle phases, affecting investments, interest rates, production, labor productivity, employment rate, etc. It also discusses the way how erroneous beliefs or preferences of stock market investors affect their cognitive process regarding the investment activity and how manipulated behavior determines negative results. In the end, the paper emphasizes the connection between the evolution of the stock market and the succession of business cycle phases, showing how mass behaviors taking place inside stock markets affect the overall evolution of an economy.