Emotional finance: investment and the unconscious

Abstract

ABSTRACTUnconscious mental processes are ubiquitous. However, little attention has been paid in the finance literature to date to how people’s unconscious fantasies, needs and desires help drive their investment decisions, and markets more generally. Emotional finance which is informed by the psychoanalytic understanding of the human mind sets out to explore such issues directly. This paper first describes the underlying theory and then examines some of its potential insights and empirical applications. How emotional finance more generally may help explain asset pricing bubbles and the Global Financial Crisis is also discussed, as well as the paradox the asset management industry represents. Recognising that investors are often driven by not-always conscious emotions of excitement, anxiety and denial, and markets by parallel collusive group-wide processes, this paper concludes by suggesting that the key role unconscious mental processes play in all human activity is worthy of greater attention in finance. Appropriate research methodologies and the way forward in terms of future work are also outlined.