The Influence of Affect on Beliefs, Preferences and Financial Decisions
36 Pages Posted: 12 Sep 2008 Last revised: 8 Oct 2009
Date Written: September 30, 2009
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.
Keywords: affect, emotions, beliefs, risk taking, learning, limbic system, neuroeconomics, neurofinance
JEL Classification: C91, D81, G11
Suggested Citation: Suggested Citation