Individual investors trade relative to hope and fear in financial markets. What does behavioural economics have to say about that? Well, in a recent short research note available at http://ssrn.com/abstract=1995777 it is shown that a confidence matrix operator explains much of that. Subjects transform gain domains into fear of loss. Consequently, they become loss averse and risk averse over gains. , An adjoint transformation of loss domains into hope of gain induces risk seeking behaviour over losses. These phenomena are measured by a confidence index generated from a sample probability distribution.. Whereupon confidence curves are plotted over loss and gain domains, and superimposed. There, one can see that some people are so risk averse that they do not participate in the market. While risk seekers seem to participate fully and interact with risk averters whose risk tolerance is above a certain threshold.

The model was used in conjunction with Gallup Daily Economic Confidence Index to produce a forecast for financial markets in the first half of 2013. The graphics plainly show that the confidence operator captures key dynamics of the Gallup index which is obtained from telephone surveys. The forecast is available at

https://docs.google.com/viewer?a=v&pid=explorer&chrome=true&srcid=0B5-34Dn8lnleMDlkZGI2MmUtZmNkOS00YmM0LThjYTAtNDQ0YjNkNjY4ODJi