Investor psychology plays a powerful role in shaping stock market movements. While economic data, earnings, and company fundamentals provide the foundation for market valuation, human behaviour often drives short-term fluctuations. Emotions like fear and greed frequently influence decisions, sometimes pushing prices far from their true value. For example, fear during downturns can trigger panic selling, driving stocks lower than fundamentals justify. On the other hand, greed during rallies can fuel bubbles, as investors chase returns and overlook risks.

Cognitive biases also affect market activity. Overconfidence can lead investors to trade excessively, while herd behaviour encourages individuals to follow the crowd rather than rely on independent analysis. Loss aversion—the tendency to fear losses more than valuing equivalent gains—often causes people to hold onto losing positions, delaying rational exits. Recency bias makes investors overweight recent events, creating exaggerated reactions to earnings reports or economic news.

Social and cultural factors amplify these effects. Media headlines, analyst opinions, and now social platforms can spread optimism or fear quickly across markets. This collective psychology often drives volatility, especially in uncertain times.

Ultimately, investor psychology helps explain why markets are not always efficient. Recognising these behavioural influences allows traders and investors to better anticipate market swings and manage their own decision-making with greater discipline.