Article2007

Affect and Financial Decision-Making: How Neuroscience Can Inform Market Participants

93 citations0/0 files storedJournal of Behavioral Finance

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Decision-Making and Behavioral Economics Financial Markets and Investment Strategies Neural and Behavioral Psychology Studies

Abstract

We review recent neuroscience literature on the influences of moods, attitudes, and emotions (affects) on financial decision-making. Evidence indicates the existence of separate brain systems, linked to affect processing, that are responsible for risk-taking and risk-avoiding behaviors in financial settings. Excessive activation or suppression of either system can lead to errors in investment choices and trading behaviors. We suggest ways for market participants to become aware of the potential impact of affect on their behavior in order to avoid suboptimal financial decisions. This paper has two overall aims: to educate financial practitioners about the origins of emotions that can adversely impact their performance, and to teach investors how to make better financial decisions.

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References

2013Diagnostic and Statistical Manual of Mental Disorders 1999Working with Emotional Intelligence 2001Risk as feelings.1983Mood, misattribution, and judgments of well-being: Informative and directive functions of affective states.1998Are Investors Reluctant to Realize Their Losses?2004Heuristics and Biases: The Psychology of Intuitive Judgment 2001Investor Psychology and Asset Pricing 2002The Affect Heuristic

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