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Emotions, Bayesian Inference, and Financial Decision Making

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  • Salzman, Diego
  • Trifan, Emanuela

Abstract

This paper presents a model in which rational and emotional investors are compelled to make decisions under uncertainty in order to ensure their survival. Using a neurofinancial setting, we show that, when different investor types fight for market capital, emotional traders tend not only to influence prices but also to have a much more developed adaptive mechanism than their rational peers, in spite of their apparently simplistic demand strategy and distorted revision of beliefs. Our results imply that prices in financial markets could be seen more accurately as a thermometer of the market mood and emotions rather than as simple informative signals as stated in traditional financial theory.

Suggested Citation

  • Salzman, Diego & Trifan, Emanuela, 2006. "Emotions, Bayesian Inference, and Financial Decision Making," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 28163, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    • Handle: RePEc:dar:wpaper:28163
    Note: for complete metadata visit http://tubiblio.ulb.tu-darmstadt.de/28163/
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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