Emotion and financial markets
Psychologists and economists hold vastly different views about human behavior. Psychologists contend that economists' models bear little relation to actual behavior. This view is supported by a large body of psychological research that shows that emotional state can significantly affect decision making. ; Economists, on the other hand, argue that psychological studies have no theoretical basis and offer little empirical evidence about people's decision-making processes. The reigning financial economics paradigm-the efficient market hypothesis (EMH)-assumes that individuals make rational investment decisions using the rules of probability and statistics. A newer branch of financial economics called behavioral finance applies lessons from psychology to financial decision making, but most of these studies have focused on cognitive biases rather than emotion. ; The authors of this article argue that emotion has important, and possibly beneficial, influences on financial behavior. After defining the term emotion and describing how emotions can be categorized, the authors consider how emotions influence human behavior. The discussion focuses particularly on three aspects of emotion and financial decision making: emotional disposition and stock market pricing, the feeling of regret, and investors' emotional response to information. ; No new financial economics paradigm that incorporates behavioral influences and better models actual behavior has yet emerged to replace the EMH. Yet the authors believe that emotional behavior's influence on financial decision making should be taken into account in future research.
Volume (Year): (2003)
Issue (Month): Q2 ()
|Contact details of provider:|| Postal: |
Web page: http://www.frbatlanta.org/
More information through EDIRC
|Order Information:|| Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Benjamin E. Hermalin and Alice M. Isen., 1999.
"The Effect of Affect on Economic and Strategic Decision Making,"
Economics Working Papers
E99-270, University of California at Berkeley.
- Hermalin, Benjamin E. & Isen, Alice M., 1999. "The Effect of Affect and Economic and Strategic Decision Making," Department of Economics, Working Paper Series qt4fn1b57s, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Benjamin E. Hermalin & Alice M. Isen, 2000. "The Effect of Affect on Economic and Strategic Decision Making," Method and Hist of Econ Thought 9912001, EconWPA.
- Benjamin E. Hermalin & Alice M. Isen, 2000. "The Effect of Affect on Economic and Strategic Decision Making," Econometric Society World Congress 2000 Contributed Papers 1136, Econometric Society.
- Romer, Paul M., 2000.
"Thinking and Feeling,"
1618, Stanford University, Graduate School of Business.
- Andrew W. Lo & Dmitry V. Repin, 2001. "The Psychophysiology of Real-Time Financial Risk Processing," NBER Working Papers 8508, National Bureau of Economic Research, Inc.
- David Hirshleifer & TYLER G. SHUMWAY, 2004.
"Good Day Sunshine: Stock Returns and the Weather,"
- Shleifer, Andrei, 2000. "Inefficient Markets: An Introduction to Behavioral Finance," OUP Catalogue, Oxford University Press, number 9780198292272, March.
- Jon Elster, 1998. "Emotions and Economic Theory," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 47-74, March.
- Mark Kamstra & Lisa Kramer & Maurice Levi, 2002.
"Winter blues: a SAD stock market cycle,"
2002-13, Federal Reserve Bank of Atlanta.
- Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
- Chen, Shu-Heng & Yeh, Chia-Hsuan, 2002. "On the emergent properties of artificial stock markets: the efficient market hypothesis and the rational expectations hypothesis," Journal of Economic Behavior & Organization, Elsevier, vol. 49(2), pages 217-239, October.
- Charles Lee & Andrei Shleifer & Richard Thaler, 1990.
"Investor Sentiment and the Closed-End Fund Puzzle,"
NBER Working Papers
3465, National Bureau of Economic Research, Inc.
- David Hirshleifer, 2001.
"Investor Psychology and Asset Pricing,"
Journal of Finance,
American Finance Association, vol. 56(4), pages 1533-1597, 08.
- Jamal, Karim & Sunder, Shyam, 1996. "Bayesian equilibrium in double auctions populated by biased heuristic traders," Journal of Economic Behavior & Organization, Elsevier, vol. 31(2), pages 273-291, November.
- Wright, William F. & Bower, Gordon H., 1992. "Mood effects on subjective probability assessment," Organizational Behavior and Human Decision Processes, Elsevier, vol. 52(2), pages 276-291, July.
- Lucy F. Ackert & Bryan K. Church, 1998. "The effects of subject pool and design experience on rationality in experimental asset markets," Working Paper 98-18, Federal Reserve Bank of Atlanta.
- Kahneman, Daniel & Tversky, Amos, 1979.
"Prospect Theory: An Analysis of Decision under Risk,"
Econometric Society, vol. 47(2), pages 263-91, March.
- Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
- Daniel, Kent & Hirshleifer, David & Teoh, Siew Hong, 2002. "Investor psychology in capital markets: evidence and policy implications," Journal of Monetary Economics, Elsevier, vol. 49(1), pages 139-209, January.
When requesting a correction, please mention this item's handle: RePEc:fip:fedaer:y:2003:i:q2:p:33-41:n:v.88no.2. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Meredith Rector)
If references are entirely missing, you can add them using this form.