Understanding the Chinese Stockmarket Bubble: The Role of Emotion
32 Pages Posted: 23 Oct 2010
Date Written: September 14, 2010
Between June 2005 and October 2007, when it peaked, the Chinese stockmarket went up five-fold; it then went into freefall losing 70% of its value over the following year. Such a market price trajectory represents that of a classic stockmarket bubble. This paper seeks to explain what was going on among Chinese investors at this time drawing on the insights of emotional finance, a new branch of behavioral finance, which explores some of the unconscious processes driving individual investment decisions, and market behaviors and, in particular, the role of unconscious fantasies. Comparisons between the dot.com bubble of only a few years previously, and the current Chinese real-estate bubble are drawn. The paper concludes that we need to recognize more formally in finance the emotional needs of investors, and their unconscious fantasies and fears in seeking fully to understand their investment behavior, in this way complementing the cognitive perspectives of more traditional behavioral finance.
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