The emotional business of
finance
Prof. Mark Fenton-O’Creevy
Phineas Gage (1823- 1860)
Advances in neuroscience research
Amygdala
Hippocampus
A dual process view of cognition
Facts
Reasoning
strategies
Options
for
decision
Decision
Representation of
future outcome
Activation of biases related to
previous emotional
experience of comparable
situations
Bechara, A., Damasio, A., Tranel, D., & Damasio, A. R. 1997.
Deciding advantageously before knowing the advantageous strategy, Science, Vol. 275.
Situation
Trader
Trader Manager
Different categories of emotion in
traders decision-making
• Interaction between mood and trading
• Intuition: it feels like the right answer
• Empathy: a sense for what other market
players are feeling
Emotional self-regulation (Low performers)
• I’m bit of a cold fish; I don’t think emotions greatly affect my
decision making. If you are making money, you are achieving your
objective.…
[But later]
• …When you lose money, it can be horrendous, violent mood
swings. You don’t know what to do when you lose money…
Managers on the desk are an added pressure, and my
colleagues, so this emotion can encourage you to make decisions
more quickly.… It is important to have a recovery period from
losses to be more emotionally stable before you go back in [to
trading].
• I think there is, [a strong emotional element to trading] I think that
anyone who’s doing it properly and has got their head screwed on
is doing everything they can consciously to overrule that, and if I
feel that I’m trading emotionally I will walk off the desk, have a
glass of water, walk up and down the street and then come back
and make decisions when I’m hopefully not emotional.
Emotional self-regulation (High performers)
Emotion and rationality are not at opposite ends, they co-exist the entire time.
You buy in at 50, they go to 48, you refuse to believe it. Your rational side says
you’ve got it wrong. Your emotional side says the market is wrong so you buy
some more. They go to 46; you’re really pissed off now, you’re not going to sell
them, you’re not going to take this. They go to 42 your rational side kicks in and
says I got this wrong and I am out and it doesn’t necessarily - I am not
suggesting it happens in that sequence every time but the two always co-exist.
The two always co-exist.
Big losses and big gains can swap around fairly quickly and once you
understand that then you stop concentrating on the loss and you start
concentrating more on how to make money back. … One big trade is not going
to make anyone and one big loss doesn’t destroy you.
Bringing the data together
Key findings
• Emotions play a role both beneficial and adverse in the
financial decision making of finance professionals
• Effective management of emotions is associated with
improved performance
• Improved self-regulation of emotions can be trained
• This all turns out to be true for private investors but more
so.
But what about consumers?
Impulsive buying: a consumer's
tendency to buy spontaneously,
unreflectively and, immediately,
(Rook & Fisher, 1995)
I often buy things spontaneously.
"Just do it" describes the way I buy
things
I often buy things without thinking
"I see it, I buy it" describes me
"Buy now, think about it later"
describes me.
Key findings
• We can understand impulsive buying as a form of
maladaptive emotion regulation to promote good
feelings and repair bad feelings
• Impulsive shopping has significant adverse financial
consequences.
• Retailers invest significant resources in engaging with
our emotions to promote impulsive buying (“Because
you are worth it”) – perhaps we need an investment in
education which promotes emotional literacy about
money
Attitudes to money
•
•
•
•
Money as power
Money as love
Money as freedom
Money as security
• Strong relationship to financial outcomes
A final observation
• Policy makers often seek to influence behaviour by
providing information
• Firms, through advertisements often seek to influence
behaviour through engaging with emotions
• Guess who is more pessimistic about affecting
consumer behaviour?