The Role of Individual, Emotional, and Psychological Factors in Market Risk Fluctuations: A Thematic Theory Approach عوامل روان شناختی در نوسانات ریسک بازار: بر اساس رویکرد نظریه ی تئوری مضمون

The Role of Individual, Emotional, and

 Psychological Factors in Market Risk Fluctuations: A Thematic Theory Approach

عوامل روان شناختی در نوسانات ریسک بازار: بر اساس رویکرد نظریه ی تئوری مضمون

Authors:

1. Dr. Mohammad Mohamadi Pour, Department of Industrial–Financial Management, Islamic Azad University, Science and Research Branch, Faculty of Management and Economics, Tehran, Iran
📧 Mohammadi.pour1@gmail.com


2. Dr. Ghodrat Talebnia*, Associate Professor, Department of Accounting, Islamic Azad University, Science and Research Branch, Tehran, Iran
📧 Gh_talebnia@yahoo.com




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Abstract

Investor behavior in emerging financial markets is deeply influenced by emotional and psychological factors that shape risk perception and investment decisions. This study aims to identify and analyze the role of individual, emotional, and psychological components in explaining market risk fluctuations in Iran’s capital market. Using a thematic theory approach, qualitative themes were extracted from interviews with 25 professional investors and 10 financial analysts, while quantitative validation was conducted through a behavioral finance questionnaire distributed among 300 active investors in the Tehran Stock Exchange. Results indicate that emotional volatility, overconfidence, financial anxiety, and unrealistic optimism are the most influential themes driving irrational risk-taking. Moreover, investment experience moderates the relationship between emotional intensity and market risk perception. The proposed thematic model highlights that investor emotions not only affect short-term volatility but also contribute to systemic risk formation. Findings provide valuable implications for behavioral finance training, risk management, and policy design aimed at stabilizing emerging markets.

Keywords:
Behavioral finance, emotional bias, psychological traits, market risk, thematic analysis, investor behavior


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1. Introduction

Financial decision-making in capital markets has traditionally been grounded in the assumption of rationality. However, growing evidence from behavioral finance challenges this paradigm, suggesting that emotions and psychological biases significantly distort investors’ perceptions of risk and return (Barberis & Thaler, 2003).
The Iranian stock market, characterized by high volatility and information asymmetry, provides an ideal environment for investigating the emotional and psychological foundations of investor behavior. This research adopts a thematic theory approach to explore how emotional impulses and individual differences contribute to risk fluctuations. The thematic framework enables the identification of recurring patterns of thought and feeling that influence financial choices beyond traditional econometric variables.


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2. Theoretical Background and Literature Review

The Thematic Theory Framework emphasizes identifying latent meanings within investors’ cognitive and emotional processes. This approach goes beyond linear causality by connecting multiple psychological themes that collectively shape market outcomes.
Classical works such as Kahneman and Tversky’s (1979) Prospect Theory highlight that losses loom larger than gains, driving asymmetrical risk responses. Subsequent studies (Shefrin, 2007; Lo, 2012) established that emotions, rather than pure logic, dictate financial reactions under uncertainty.
In the Iranian context, Samadi et al. (2021) and Askari (2019) observed that collective euphoria and panic waves amplify market cycles. The thematic dimensions identified in previous research include:

1. Emotional Reactivity – sensitivity to market news and price shocks.


2. Overconfidence Bias – overestimation of analytical accuracy and control.


3. Financial Anxiety – perceived stress during market downturns.


4. Optimism Bias – unrealistic expectations about future returns.


5. Experience Moderation – adaptive learning reducing emotional misjudgments.




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3. Methodology

The study follows a mixed-method thematic design. In the qualitative phase, in-depth semi-structured interviews were conducted with experienced investors to extract behavioral themes. Data were coded using NVivo 14 software following Braun & Clarke’s (2006) six-step thematic analysis process.
The quantitative phase employed a behavioral finance inventory distributed among 300 active investors in Tehran Stock Exchange. Data were analyzed using Structural Equation Modeling (SEM) in AMOS 26. Reliability (Cronbach’s α = 0.89) and validity (KMO = 0.86) confirmed the robustness of the measurement model.


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4. Findings

The thematic analysis identified four dominant behavioral themes influencing market risk:

Emotional Volatility: investors’ reactions to uncertainty intensify short-term fluctuations.

Cognitive Overconfidence: leads to excessive trading and underestimation of losses.

Financial Anxiety: correlates with premature sell-offs and loss aversion.

Unrealistic Optimism: fosters speculative bubbles.


SEM results confirmed significant paths between emotional volatility and systematic risk (β = 0.68, p < 0.01). Experience moderated the emotional-risk link, reducing irrational responses among veteran investors.


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5. Discussion and Conclusion

This study provides empirical support for the Thematic Theory of Behavioral Risk, suggesting that collective emotional patterns are critical in understanding market dynamics. Emotional and psychological traits create feedback loops that drive volatility beyond fundamental valuations.
The findings have theoretical implications for integrating psychological variables into financial risk models and practical implications for investor education, portfolio management, and regulatory policy. Policymakers are encouraged to incorporate behavioral monitoring and sentiment indices in market oversight frameworks.


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References

1. Barberis, N., & Thaler, R. (2003). A survey of behavioral finance. Handbook of the Economics of Finance.


2. Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica.


3. Shefrin, H. (2007). Beyond greed and fear: Understanding behavioral finance and the psychology of investing. Oxford University Press.


4. Lo, A. W. (2012). Adaptive markets: Financial evolution at the speed of thought. Princeton University Press.


5. De Bondt, W. & Thaler, R. (1985). Does the stock market overreact? Journal of Finance, 40(3), 793–805.


6. Braun, V., & Clarke, V. (2006). Using thematic analysis in psychology. Qualitative Research in Psychology, 3(2), 77–101.


7. Hirshleifer, D. (2001). Investor psychology and asset pricing. Journal of Finance, 56(4), 1533–1597.


8. Samadi, M., & Asghari, F. (2021). Emotional behavior of investors in Tehran Stock Exchange. Iranian Journal of Financial Studies.


9. Askari, F. (2019). Behavioral biases and market volatility: Evidence from Iran. Financial Research Quarterly.


10. Kumar, A., & Lee, C. (2006). Retail investor sentiment and return comovements. Journal of Finance, 61(5), 2451–2486.