The Influence of Affect on Beliefs, Preferences and Financial Decisions
Neuroeconomics research shows that brain areas that generate emotional states also process information about risk, rewards, and punishments, suggesting that emotions influence financial decisions in a predictable and parsimonious way. We find that positive emotional states such as excitement induce people to take risks and to be confident in their ability to evaluate investment options, while negative emotions such as anxiety have the opposite effects. Beliefs are updated so as to maintain a positive emotional state by ignoring information that contradicts individuals’ prior choices. Marketplace features or outcomes of past choices may change emotions and thus influence future financial decisions.
Kuhnen, Camelia M. and Brian Knutson. 2011. The Influence of Affect on Beliefs, Preferences and Financial Decisions. Journal of Financial and Quantitative Analysis. 46(3): 605-626.