Peter H. Huang Harold E. Kohn Chair Professor of Law James ...

Emotional Impact Analysis
and mergers and acquisitions, individual debt, market liquidity, and securities demand. In other words,
“[s]tock market prices reflect both (fundamental) value and sentiment.” 96 Seventy years ago, a famous
macroeconomist John Maynard Keynes utilized the phrase “animal spirits” to describe investor optimism
or pessimism when he stated that:
Even apart from the instability due to speculation, there is the instability due to the
characteristic of human nature that a large proportion of our positive activities depend on
spontaneous optimism rather than mathematical expectations, whether moral or
hedonistic or economic. Most, probably, of our decisions to do something positive, the
full consequences of which will be drawn out over many days to come, can only be taken
as the result of animal spirits - a spontaneous urge to action rather than inaction, and not
as the outcome of a weighted average of quantitative benefits multiplied by quantitative
probabilities. 97
Noted economist John Kenneth Galbraith believed there is not much that securities regulators can
do about financial euphoria. 98 In contrast, several legal scholars have proposed that securities regulators
can and should regulate financial market euphoria. 99
Recent evidence suggests that relationships between emotional considerations and financial
economic variables not only exist, but also run surprisingly in both directions. There is a growing body
of intriguing empirical data demonstrating that local astronomical and meteorological conditions are
correlated with market index returns on international financial exchanges. 100 There is medical and
Geoffrey Tate, Does Overconfidence Affect Corporate Investment? CEO Overconfidence Measures Revisited, 11
EUR. FIN. MGMT. 649 (2005) (presenting supplementary evidence about how CEO portrayals in popular financial
press are related to overconfident investment decisions); Rajnish Mehra & Raaj Sah, Mood Fluctuations, Projection
Bias, and Volatility of Equity Prices, 26 J. ECON. DYNAMICS & CONTROL 869 (2002); John R. Nofsinger, Social
Mood and Financial Economics, 6 J. BEHAV. FIN. 144, 147-49, 152-55, 157-58 (2005); JOHN R. NOFSINGER, THE
PSYCHOLOGY OF INVESTING 86-96 (2d ed. 2005); Richard L. Peterson, Buy on the Rumor: Anticipatory Affect and
Investor Behavior 3 J. PSYCHOL. & FIN. MARKETS 218 (2002); and Richard J. Rosen, Merger Momentum and
Investor Sentiment: The Stock Market Reaction to Merger Announcements, 79 J. BUS. 987 (2006).
96 Kenneth L. Fisher & Meir Statman, Sentiment, Value, and Market-Timing, FIN. ANALYSTS J., Fall 2004, at 10.
97 JOHN MAYNARD KEYNES, THE GENERAL THEORY OF EMPLOYMENT , INTEREST AND MONEY 161-62 (1936).
98 JOHN KENNETH GALBRAITH, A SHORT HISTORY OF FINANCIAL EUPHORIA108 (1993).
99 See e.g., Theresa A. Gabaldon, The Role of Law in Managing Market Moods: The Whole Story of Jason, Who
Bought High, 69 GEO. WASH. L. REV. 111 (2000); Theresa A. Gabaldon, John Law, With A Tulip, In the South Seas:
Gambling and the Regulation of Euphoric Market Transactions, 26 J. CORP. L. 225 (2001); and Donald C.
Langevoort, Taming the Animal Spirits of the Stock Markets: A Behavioral Approach to Securities Regulation, 97
NW. U. L. REV. 135 (2002).
100 See e.g., Melanie Cao & Jason Wei, Stock Market Returns: A Note on Temperature Anomaly, J. BANKING & FIN.
(2002) (finding that for eight international stock markets, returns are statistically significantly and negatively
correlated with temperature); Melanie Cao & Jason Wei, An Expanded Study of the Stock Market Temperature
Anomaly 22 RES. IN FIN. 73 (2005) (expanding on and confirming their previous research to include nineteen
additional financial markets); Ilia D. Dichev & Troy D. Janes, Lunar Cycle Effects in Stock Returns, J. PRIVATE
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