Buy on the Rumor : " Anticipatory Affect and Investor Behavior

In this paper we demonstrate a relationship between investor psychology and security pricing around anticipated events. Taking a multidisciplinary approach, we pull together research in the finance, psychology, and neuroscience literature. Event-studies in the finance literature demonstrate anomalous security (stock, commodity, bond, or option) price movements around the dates of anticipated security-related events. From the neuroscience literature we demonstrate correlations between reward anticipation and the arousal of affect (feelings, emotions, moods, attitudes, and preferences). From the cognitive psychology literature we extract evidence for the central role of affect in motivating investing behavior. We briefly outline an investment strategy for exploiting the event-related security price pattern described by the trading strategy, "buy on the rumor and sell on the news."