The Influence of Affect on Beliefs, Preferences and Financial Decisions

36 Pages Posted: 12 Sep 2008 Last revised: 8 Oct 2009

Camelia M. Kuhnen

University of North Carolina Kenan-Flagler Business School

Brian Knutson

Stanford University - Psychology

Date Written: September 30, 2009

Abstract

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

Kuhnen, Camelia M. and Knutson, Brian, The Influence of Affect on Beliefs, Preferences and Financial Decisions (September 30, 2009). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1266423

Camelia M. Kuhnen (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
(919) 9623284 (Phone)

HOME PAGE: http://public.kenan-flagler.unc.edu/faculty/kuhnenc/

Brian Knutson

Stanford University - Psychology ( email )

Stanford, CA 94305
United States
650 723 7431 (Phone)
650 725 5699 (Fax)

HOME PAGE: http://psychology.stanford.edu/~knutson

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