Fear, Greed, and Financial Crises: A Cognitive Neurosciences Perspective

50 Pages Posted: 14 Oct 2011  

Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER); Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL)

Date Written: October 13, 2011

Abstract

Historical accounts of financial crises suggest that fear and greed are the common denominators of these disruptive events: periods of unchecked greed eventually lead to excessive leverage and unsustainable asset-price levels, and the inevitable collapse results in unbridled fear, which must subside before any recovery is possible. The cognitive neurosciences may provide some new insights into this boom/bust pattern through a deeper understanding of the dynamics of emotion and human behavior. In this chapter, I describe some recent research from the neurosciences literature on fear and reward learning, mirror neurons, theory of mind, and the link between emotion and rational behavior. By exploring the neuroscientific basis of cognition and behavior, we may be able to identify more fundamental drivers of financial crises, and improve our models and methods for dealing with them.

Keywords: financial crisis, neuroeconomics, animal spirits, behavioral finance

JEL Classification: G18, G28, G38, D10, D81

Suggested Citation

Lo, Andrew W., Fear, Greed, and Financial Crises: A Cognitive Neurosciences Perspective (October 13, 2011). Available at SSRN: https://ssrn.com/abstract=1943325 or http://dx.doi.org/10.2139/ssrn.1943325

Andrew W. Lo (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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National Bureau of Economic Research (NBER) ( email )

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Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL)

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