Money and Sentiment: A Psychodynamic Approach to Behavioral Finance

Abstract

This article tackles one of the timeliest issues for both practitioners and patients today: sentiment, psychodynamics, and the stock market. Economic bubbles and crashes have occurred regularly through history -- from Holland's 17th century tulip mania, to America's 19th century railway mania, to the 1990s high-tech obsession. Though most investors regard themselves as investing rationally, few do. Instead they react collectively, buying high and selling low in crowds. Being subject to the illusion of control, they follow regressive behavior patterns and irrational, wishful thinking. They are victimized by their own emotions of hope, fear, and uncertainty. Crises happen often in economics. Indeed, the market itself may be quantified as a conglomeration of human sentiment. The relationship between magical thinking and the pictorial language of the market will be explored. Psychodynamic conceptualizations about risk and speculation are discussed, as are the interplay of affects versus judgment, rational thinking, and the knowledge of one's own capacity for stress tolerance.

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