The Impact of Psychological Mechanisms of Rumor Propagation on Stock Valuation and Investors' Rational Balance Strategies

From an evolutionary psychology perspective, the phenomenon that investors are more inclined to believe rumors than objective facts is rooted in millions of years of human evolutionary history. In the era of information scarcity, our ancestors developed rapid information processing mechanisms, which had obvious survival advantages at that time [4].

Heuristic thinking in the human cognitive system has formed strong adaptability during evolution. When facing uncertainty, reacting quickly based on limited information is often more important than spending time verifying accuracy—for example, when hearing a rustle in the grass, assuming it’s a predator and running away immediately, even if the judgment is wrong, it won’t cause too much loss, but if you wait until the threat is confirmed, it may be too late [4].

This cognitive preference has evolved into modern investors’ sensitivity to rumors. In the capital market, the

often overrides the need for rational analysis. Investors easily accept rumors that seem plausible because this aligns with the brain’s evolutionary tendency to pursue efficiency rather than absolute accuracy [4].

Evolutionary psychology research shows that humans tend to imitate others, especially the behaviors and beliefs of individuals considered successful or influential [4]. This imitation behavior has significant survival value in human evolutionary history—by following successful individuals in the group, individuals can learn adaptive behavior patterns faster.

In the capital market, this mechanism manifests as

and . When a rumor starts to spread, investors will observe others’ reactions; if they see someone taking action, they are more likely to believe the credibility of the rumor [3]. This social proof mechanism is effective in the evolutionary environment, but often leads to irrational pricing in the modern complex market.

Investors’ attention resources are limited. In the era of information overload, investors cannot process all available information evenly and often focus on more eye-catching, prominent, or easily accessible information sources [1]. This

causes certain specific rumors to have an excessive impact on prices in the short term.

Research shows that rumors usually have the following characteristics, making them advantageous in attracting attention:

• Emotional stimulation
  : Rumors often contain dramatic or threatening content, which is more likely to cause emotional reactions
• Easy to understand
  : Compared with complex financial data, rumors are usually simpler and more direct
• Novelty
  : Rumors often provide “exclusive” or “insider” information, satisfying investors’ sense of information advantage

Prospect Theory proposed by Nobel laureates Kahneman and Tversky reveals humans’ asymmetric attitudes toward gains and losses: most people tend to be conservative when facing gains, but are often unwilling to accept losses and are willing to take greater risks to “recover losses” [1].

In the context of rumor propagation, this loss aversion psychology manifests as:

• Greater impact of negative rumors
  : Negative rumors about potential company problems often spread faster and have a greater impact than positive rumors
• Overreaction tendency
  : Investors may overreact to potential losses implied by rumors, leading to excessive stock price declines

Confirmation bias makes people tend to seek and interpret information that supports their existing beliefs while ignoring contrary evidence [3]. In the era of social media, this bias is further amplified, forming an

:

• Investors are more likely to accept rumors that align with their existing position views
• Social media algorithms push information that matches users’ preferences, reinforcing existing views
• Information isolation among different investment groups exacerbates market segmentation and valuation divergence

To overcome evolutionarily formed cognitive biases, investors need to establish a systematic investment decision-making framework to reduce the impact of emotions and intuition on decisions:

• Always take the company’s financial health and operational fundamentals as the core basis for investment decisions
• Conduct strict evidence evaluation of rumors to distinguish between facts and speculation
• Establish a regular tracking mechanism for financial data to form an objective evaluation benchmark

• Seek confirmation from multiple independent information sources for any important market rumors
• Pay special attention to financial reports and announcements officially disclosed by the company
• Establish information credibility evaluation standards to distinguish between primary and secondary information sources

• Regularly record your investment decision-making process and the reasoning behind it
• Analyze bias patterns in past decisions to form a personalized list of cognitive biases
• Deliberately check for common cognitive biases before making important decisions

• Set a cooling-off period for sudden rumors and major market fluctuations to avoid immediate reactions
• Use technical analysis tools to verify the rationality of market reactions
• Adopt reverse thinking to evaluate opportunities when market sentiment is extreme

• Use quantitative analysis tools to establish an investment screening system to reduce the interference of subjective judgments
• Use sentiment index indicators (such as VIX fear index, margin trading data, etc.) to evaluate market sentiment status
• Establish a rumor impact evaluation model based on historical data

• Set strict stop-loss and position management rules to control the maximum loss of a single investment
• Diversify investments to reduce the impact of rumors about a single company on the overall portfolio
• Regularly rebalance the investment portfolio to avoid over-concentration

Based on behavioral finance research, effective investor education should include the following aspects:

• Learn to identify and manage emotional reactions during the investment process
• Cultivate a long-term investment perspective and reduce excessive attention to short-term fluctuations
• Establish a normalized cognition of investment failures to avoid missing opportunities due to fear

• Learn basic financial analysis methods to improve information processing ability
• Understand common cognitive biases and their impact on investment decisions
• Cultivate critical thinking ability to improve information screening ability

• Think independently and avoid blindly following market hotspots and rumors
• Use social media rationally to avoid falling into the information echo chamber
• Seek diversified investment views to balance information sources

The impact of rumor propagation on stock valuation is rooted in cognitive mechanisms formed during human evolution. Evolutionary adaptive characteristics such as heuristic thinking, social learning, and attention bias often become obstacles to rational investment in the complex modern capital market.

Successful investors need to establish a systematic investment framework, develop effective bias management strategies, and use modern technical tools to assist decision-making on the basis of fully understanding these cognitive limitations. By combining evolutionarily formed “intuition” with strict rational analysis, investors can maintain a competitive advantage in the information-heavy and emotion-driven market and achieve long-term stable investment returns.

The key lies in understanding and respecting the evolutionary design of our brains, while establishing systems and processes that can effectively supplement these cognitive limitations. As the famous investor Charlie Munger said: “If you don’t understand psychology, you can’t really understand investment.”

[1] 新浪财经 - “浅析行为金融学在量化投资领域的应用” (https://finance.sina.com.cn/stock/zqgd/2025-04-24/doc-ineufhcf3801544.shtml?froms=ggmp)

[2] 社科网 - “投资者情绪对创业板股票收益率的影响研究” (https://www.sinoss.net/upload/resources/file/2025/09/04/46221.pdf)

[3] OSL - “心理学如何影响市场” (https://www.osl.com/hk-Hans/academy/article/how-does-psychology-impact-the-market)

[4] JMIR Infodemiology - “Understanding and Combating Misinformation: An Evolutionary Perspective” (https://infodemiology.jmir.org/2024/1/e65521/)

[5] ACR Journal - “Studying the Influence of Cognitive Biases on the Investment Decision-making of Retail Investors in India” (https://acr-journal.com/article/studying-the-influence-of-cognitive-biases-on-the-investment-decision-making-of-retail-investors-in-india-1513/)

[6] PMC NCBI - “Unpacking Investor Psychology: A Systematic Review and Meta-analysis” (https://pmc.ncbi.nlm.nih.gov/articles/PMC12576316/)