The Influence of Affect on Beliefs, Preferences and Financial Decisions
Camelia M. Kuhnen
University of North Carolina Kenan-Flagler Business School
Stanford University - Psychology
September 30, 2009
Journal of Financial and Quantitative Analysis (JFQA), Forthcoming
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 risk and to be confident in their ability to evaluate investment options, while negative emotions such as anxiety have the opposite effects. Beliefs are updated such 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.
Number of Pages in PDF File: 36
Keywords: affect, emotions, beliefs, risk taking, learning, limbic system, neuroeconomics, neurofinance
JEL Classification: C91, D81, G11
Date posted: September 12, 2008 ; Last revised: October 8, 2009
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