Fear, Greed, and Financial Crises

Abstract

Abstract Chapter 11 describes recent research from the neurosciences literature on fear and reward learning, mirror neurons, theory of mind, and the link between emotion and rational behaviour. Historical accounts of financial crises suggest that fear and greed are the common denominators of these disruptive events. Periods of unchecked greed eventually lead to excessive leverage and unsustainable asset-price levels, and the inevitable collapse results in unbridled fear, which must subside before any recovery is possible. The cognitive neurosciences may provide some new insights into this boom–bust pattern through a deeper understanding of the dynamics of emotion and human behaviour. By exploring the neuroscientific basis of cognition and behaviour, we may be able to identify more fundamental drivers of financial crises, and improve our models and methods for dealing with them.

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