Understanding Investor Sentiment Harvard Case Solution & Analysis


Investor sentiments:

An investor sentiment is the overall investor attitude towards the financial market or a particular security. In financial /stock markets, investor sentiments are always present that can be seen when the price probabilities of present values of future return fluctuate. Investor sentiments originate because of two main reasons. They are as follows:

First reason:

Investor is highly confident about the future returns. This means that investor believes that the expected future outcomes will higher than its true likelihood.

Second reason:

Another reason for investor sentiment is that the investor may assign correct values to the event outcome but react emotionally to the changes in the returns due to uncertainty.

Problem and Its Scope:

Investor sentiments play very important part in measuring the changes in the security prices and the short-term profit from the securities. If an investor expects that the price movement in stock market is going in positive direction then their sentiment is said to bullish. On the other side an investor’s sentiments are bearish; if they expect that the stock market prices are going in downward direction.

The objective of the study includes:

  • Find out investor sentiments when they invest in stock market and their reaction which come from the uncertainty of their future returns.
  • Analyze the effect of investors’ expectations regarding the future outcome of their investments (actual outcome vs. expected outcome) and understand the changes in the stock prices, which occur due to investor’s irrational reaction.



Many studies in past, assess the uncertainty of outcome and change in the efficiency of stock price that result from investing in stock market. (Edmans, 2009) investigates that     long-term investment in the stock market depends on stock price that is efficient or inefficient. In a similar way (Pfleiderer, 2010) also assess the effect of price movement on an investor’s decision of investments. Analyze the case of price sensitivity by making investment in the physical capital (Schaller, 2001). The case of making real investment in the stock market is analyzed by (Huberman, 2005).

The data used in the case of Soccer is utilized in the publically traded stock return on soccer club around important matches and in measuring investors’ different reactions related to their future outcomes.

Investors’ expectation for their future event returns is estimated by the stock price behavior around the important matches on the stock traded publicly on soccer club (Polka, 2009). There are numbers of studies that highlight the importance of prevent efficiency. The behavior of the stock price helps to estimate the expectation of investors about their future possible outcomes.

Different studies indicate that investors’ sentiments are resulted from the estimation they make about their future outcome. Investors may underestimate or overestimate about their possible future outcomes which end up in disappointment.

Several studies also indicate that the probability distribution of the possible outcome; obtained from the bookmaker odds and from the betting exchange prices are important for the analysis of the sentiment of an investor.


1. Sample size and data:

Sample size for this study consist of all the teams of ‘champions league’ and (UEFA)‘Union of European Football Associations’ which played during the time period of 2000 to 2001 and 2005-2006 on a  publicly traded match club.

The focus of the soccer club on international matches rather than on national games and match prevails because it is assessed from the analysis that the international matches’ outcome adds more value to the soccer clubs as compared to the national matches. Secondly the national games are played in the weekend days which include weekend negative effect whereas international games are played in other days of the week particularly on days between Tuesdays and Thursdays.

Teams that are included for the soccer club matches belong to Manchester United, Juventus, and Ajax etc. These sample teams played 595 different matches which had 626 numbers of observations. Soccer club sample team won about 42% of their matches, 33% won by their opponents and the remaining games were tied.

Knockout rounds are structured for the team participated in the games. The results of the matches are obtained from the RSS foundation; which was cross checked with the data results obtained from the source of bookmaker data (bet explorer)..................

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