Stock market and the psychological health of investors

• Published date: 01 August 2024
• Author: Chang Liu,Maoyong Fan
• Date: 01 August 2024
• DOI: http://doi.org/10.1111/fire.12385

DOI: 10.1111/fire.12385

LEAD ARTICLE

Stock market and the psychological health of

investors

Chang Liu1Maoyong Fan2

1Department of Finance and Insurance,Ball

State University, Muncie,Indiana, USA

2Department of Economics, Ball State

University, Muncie, Indiana, USA

Correspondence

Chang Liu, Department of Finance and

Insurance,Ball State University, Muncie, IN,

47306, USA.

Email: cliu9@bsu.edu

Abstract

Utilizing a national individual-level medical dataset and the

home bias phenomenon in investment, our study shows

a strong and robust link between declines in local stock

returns and increased antidepressant consumption among

investors. This effect intensifies in areas with higher per

capita dividend income, suggesting a direct relationship

between higher stock ownership and stronger responses.

We confirm that portfolio losses, not local economic con-

ditions, are responsible for increased antidepressant usage

during market downturns. Using the frequency of psy-

chotherapy sessions yields similar findings. Moreover, our

study supports the loss aversion hypothesis as we find

positivestock returns do not influence antidepressant usage.

KEYWORDS

Antidepressant, home bias, individual investors, prospect theory,

psychological health, psychotherapy,stock market

JEL CLASSIFICATION

G10, G18, G40, I10

1INTRODUCTION

The interplay between the stock market and investor psychology has been a focal point in the field of behavioral

finance, with significant research dedicated to understanding how investor psychology influences stock prices (e.g.,

Baker & Wurgler, 2007; Daniel et al., 1998; Hirshleifer, 2001). In contrast, the impact of stock market dynamics on

the psychological well-being of investors has not been as extensively explored. Emerging evidence suggests a cor-

relation between stock market downturns and an increase in mental health issues. Such evidence includes rising

hospital admissions for mental illness in California (Engelberg & Parsons, 2016), an increase in domestic violence (Lin

& Pursiainen, 2023), deteriorating mental health among retirees (Schwandt, 2018), and increased depression rates

Financial Review. 2024;59:561–587. wileyonlinelibrary.com/journal/fire ©2024 The Eastern Finance Association. 561

562 LIU ANDFA N

(McInerney et al., 2013). Despite these indications, comprehensive, national evidence based on medically confirmed

psychological conditions remains scarce. Our study seeks to bridge this gap by investigatingthe impact of stock mar-

ket fluctuations on investors’ mental health, utilizing a large national, individual-leveldataset that includes inpatient,

outpatient, and pharmaceutical data.

Understanding the intrinsic link between stock fluctuations and the psychological health of investors is an impor-

tant economic and financial question for a variety of reasons. First, the relationship between wealth and health

has long been a topic of interest in finance and economics. According to Gallup polls conducted between 1998

and 2022, approximately 58% of the U.S. population owns stocks.1In 2021, JPMorgan Chase & Co. estimated that

stocks represent 41% of the total financial assets held by U.S. households.2Market volatility, particularly signifi-

cant drops or “crashes,” can have a significant impact on Americans’ wealth and potentially influence their mental

health. For example, after the Dow Jones Industrial Average experienced its eighth straight weekly decline on Fri-

day, May 20th, 2022—the longest such streak since 1932, severalfinancial advisory firms’ chief investment officers

have observed that their clients are experiencing high levels of anxiety about their losses in the stock market and

frequently inquire about how they can stop losing money.3Thissuggests that evaluating the impact of stock market

fluctuations on investors’ psychological health can yield important insights into the functioning of financial markets

and the broader economy.

Second, the influence of stock market fluctuations on investors’ psychological well-being, such as mental stability,

is a critical yet frequently overlooked aspect of financial marketsthat plays a significant role in asset price formation

and financial stability.Existing research in behavioral finance typically explores how investor psychology affects stock

prices, but fails to give sufficient attention to how market movements affect investorpsychology. This is particularly

important during marketcrashes and asset bubbles, where sharp declines can induce anxiety and risk aversion, leading

to further selling and falling prices. Consequently, stock market fluctuations can influence investors’ psychological

health, therebyshaping their expectations and creating positive or negative feedback loops that influence asset prices.

Examining the relationship between market volatility, particularly declines, and investor psychological health is

challenging due to the lack of comprehensive individual-leveldatasets that provide information on both mental health

and related physical well-being. Survey data, such as the Health and Retirement Survey,may result in underreport-

ing of mental health problems because respondents may provide biased answers due to the stigma associated with

such issues. Wording of questions or interactions between the interviewer and interviewee could also cause biased

answers. To overcome this challenge, we utilize the Truven Health MarketScan Claims and Encounters Database

(MarketScan), which is a national individual-level dataset containing information on inpatient, outpatient, and phar-

maceutical claims for over 13 million individuals in the United States. The MarketScan dataset, less subject to stigma

and recall errors, provides a more reliable source of psychological problems than survey data. Compared to respond-

ing to a survey interviewer, patients are less likelyto feel mental health-related stigma when talking to a physician

because communications between patients and physicians are legally protected. Furthermore, comparedwith survey

data, the MarketScan data havehigher reporting frequencies that allow for an exploration of how investors instanta-

neously respond to market fluctuations, providing a better understanding of the feedback loop between stock prices

and investors’ psychologicalhealth.

Tomeasure investors’ psychological health, we use antidepressant prescription drug claims in the MarketScan data

as a proxyfor psychological health. Engelberg and Parsons (2016) use hospital admissions related to conditions such as

anxiety,panic disorder, and depression to measure psychological health of investors.We choose to focus on individual-

level records for filled antidepressant prescriptions for three reasons. First, these medications need to be prescribed

1Gallup’slatest data pertaining to American’s stock ownership can be found here: https://news.gallup.com/poll/266807/percentage-americans- owns-stock.

aspx(accessed on October 12th, 2022).

2See“Americans Can’t Get Enough of the Stock Market,” The Wall Street Journal, May 2, 2021.

3See “The MarketIs Melting Down and People Are Feeling It. ‘My Stomach Is Churning All Day.’” The Wall Street Journal, May 21, 2022, and “Inflation and

Stock-MarketVolatility Prompts Most Retirees to Alter Finances, Study Finds,” The Wall Street Journal, May 27, 2022.