Emotion and Financial Markets

Abstract

We are merely reminding ourselves that human decisions affecting the future, whether personal or political or economic, cannot depend on strict mathematical expectation, since the basis for making such calculations does not exist; and that it is our innate urge to activity which makes the wheels go round, our rational selves choosing between the alternatives as best we are able, calculating where we can, but often falling back for our motive on whim or sentiment or chance. —John Maynard Keynes (1964, 162–63) The popular press commonly reports that psychology drives financial decision making and moves asset prices. Yet traditional implementations of financial economic models routinely assume that individuals incorporate information into their decision processes using the rules of probability and statistics with calculated, unemotional logic. This assumption leaves little room for the influence