IT Blog

By Ivan Indriawan, Adrian Fernandez-Perez, Alexandre Garel, and Alex Edmans

We like to think our purchase decisions are based on rational calculations and facts, but we know they are often driven by emotions, too. When we splurge on nice food, clothes, or electronic gadgets, are we really thinking in terms of cost and benefit, or are we responding to stress, frustration, happiness, or excitement?

The same can be asked of financial markets. The famous “efficient markets hypothesis” argues that stock prices are driven by rational calculations. But traders are human, and humans are affected by emotions. Do these emotions feed through to the stock market?

Studying this question is difficult because people’s emotions aren’t observable. While emotions do manifest in observable actions, many such actions (aggressive behavior or language, for example) are not captured by any data.

But what if there were a way to measure the overall mood of a country and relate that to the behavior of…