Investor Psychological Biases, Rumor Propagation, and Market Pricing Efficiency

From the perspective of behavioral finance, although markets theoretically absorb public information quickly and reflect it in prices, in practice, investors’ cognitive and emotional biases undermine the assumption of a ‘fully efficient market.’ When investors are influenced by psychological tendencies such as confirmation bias (tendency to seek or overvalue information that aligns with existing beliefs), availability heuristic (overreacting to recent or salient events that are easier to recall), and representativeness heuristic (mistaking occasional events for systematic signals), their sensitivity to rational information like company announcements and financial data decreases, leading to delayed price reactions to real fundamentals, thus creating temporary pricing biases and arbitrage opportunities [2]. Additionally, loss aversion makes investors more inclined to avoid risks rather than pursue expected returns when faced with noisy information, exacerbating fluctuations from ‘irrational selling’ or ‘chasing rises and killing falls.’

Rumors spread efficiently in financial markets partly due to the ‘group vigilance’ mechanism formed during human evolution—any unvalidated rapid signals about potential threats (such as wars or disasters) are prioritized, as missing a crisis could lead to greater costs. During periods of information asymmetry or high uncertainty (e.g., banking sector turmoil in 2022-2023, port industry shocks amid China-US trade frictions), this instinct drives investors to more easily accept ‘first-impression’ rumors instead of spending time digesting company announcement data. Such rumor propagation is often accompanied by an information cascade effect: the reactions of early market participants to rumors are seen as ‘social proof’ by later participants, forming a herd effect that overshadows rational information, thus pushing prices up or down and creating a disconnect from fundamentals. In terms of information dissemination channels, social media and unofficial channels are more likely to amplify and circularly reinforce rumors, making it difficult for rational announcements to cut through the noise and further reducing pricing efficiency.

To improve market pricing efficiency and mitigate the conflict between rumors and rationality, we can proceed from three dimensions:

1. Enhance Information Transparency and Accessibility
   : Promote listed companies to disclose key financial and operational indicators (such as real-time valuation summaries and cash flow dynamics) in structured formats. Combine with big data platforms and intelligent analysis tools to convert originally scattered announcement information into ‘fact summaries’ that are easy for ordinary investors to understand, effectively improving the dissemination efficiency of rational information and offsetting the preemptive effect of rumors.

2. Strengthen Investor Behavior Governance and Education
   : Through behavioral finance-oriented training, simulated risk cognition, and strategic decision-making frameworks (e.g., establishing a systematic ‘news verification-probability update’ process), enable institutions and retail investors to return to Bayesian thinking faster after receiving rumors, set a ‘cooling-off period’ for emotional reactions, and avoid quickly changing positions driven by unvalidated information.

3. Leverage Technology to Monitor and Neutralize Irrational Signals
   : Combine natural language processing-based public opinion monitoring with market microstructure models to identify key nodes of rumor propagation (e.g., high-frequency information sources, social media influence factors), while introducing algorithmic fundamental analysis (such as multi-factor valuation models) to provide a ‘rational anchor’ for investment decisions. When the system identifies price behavior that significantly deviates from fundamentals, it can prompt fund managers to review or trigger hedging mechanisms, thereby reducing the probability of rumor-driven price crashes.

4. Institutional Intervention and Public Opinion Disclosure Mechanisms
   : Regulators can reduce the market’s reliance on unvalidated information through a unified event-driven disclosure system and rapid response mechanism (e.g., requiring companies to respond accurately within 24 hours when major rumors are widely spread). At the same time, guide securities firms/research institutions to publish fact-based in-depth research and scenario analysis, making rational strategies a more widespread information source and filling passive information gaps.

In summary, although human evolutionary instincts and rumor mechanisms will still disturb market pricing in the short term, by improving information accessibility, strengthening investors’ rational frameworks, and using technical monitoring tools, a ‘feedback reconciliation’ mechanism can be gradually established between behavioral biases and rational decision-making, enhancing the overall efficiency and stability of the market. For further analysis of how rumors evolve into price biases in specific stocks/industries (such as banking, port, or AI publishing industries), consider enabling a deep research mode to obtain more detailed daily data and public opinion evolution trajectories.

[1] Investopedia - Market Efficiency Explained: https://www.investopedia.com/terms/m/marketefficiency.asp
[2] Investopedia - Behavioral Finance: Biases, Emotions and Financial Behavior: https://www.investopedia.com/terms/b/behavioralfinance.asp