It should now be clear that information is key to determining share price. However, it is not the only factor that has an effect. Since the stock market is the product of human decision, our characteristics must also be factors. While many financial theorists argue that all market participants are rational, the reality is that we are not computers and therefore are subject to that thing which sets us apart: emotion.
Emotion causes market participants to make what, with hindsight, are determined to be emotional decisions. Fear causes us to sell stocks because we are afraid they are going lower, and greed causes us to buy stocks because we hope they are going higher. Being afraid and hoping are not rational thought processes, but rather emotional outlets in the pursuit of pleasure and pain. It hurts to lose money, and it feels great to make money.
The results are stocks that go up higher or down lower than the presently available information warrants. Eventually, rational valuation of information takes over and these stocks move toward their fair value, but the process takes time.
