19. Emotions in the Financial Markets

  1. H. Kent Baker and
  2. Victor Ricciardi
  1. Richard Fairchild

Published Online: 1 MAR 2014

DOI: 10.1002/9781118813454.ch19

Investor Behavior: The Psychology of Financial Planning and Investing

Investor Behavior: The Psychology of Financial Planning and Investing

How to Cite

Fairchild, R. (2014) Emotions in the Financial Markets, in Investor Behavior: The Psychology of Financial Planning and Investing (eds H. K. Baker and V. Ricciardi), John Wiley & Sons, Inc., Hoboken, NJ, USA. doi: 10.1002/9781118813454.ch19

Author Information

  1. Senior Lecturer in Corporate Finance, School of Management, University of Bath

Publication History

  1. Published Online: 1 MAR 2014
  2. Published Print: 31 JAN 2014

ISBN Information

Print ISBN: 9781118492987

Online ISBN: 9781118813454

SEARCH

Keywords:

  • behavioral corporate finance;
  • behavioral finance;
  • conscious and unconscious emotions;
  • emotional effects on the financial markets;
  • emotional finance

Summary

Standard or traditional finance research is based on the rational choice model that assumes market participants are fully rational, unbiased, emotionless, self-interested maximizers of expected utility. Recent research in behavioral finance recognizes that real-world investors and managers are not fully rational because they are affected by psychological biases and subject to conscious emotions in their decision making. In a paradigm shift, emotional finance considers the effect of investors' and managers' unconscious emotions and infantile phantasies on market behavior employing a Freudian psychoanalytical framework. This chapter reviews this research and considers a formal modeling framework for emotional finance.