The Psychology of Financial Markets: Keynes, Minsky and Emotional Finance

Abstract

This paper is concerned with drawing on both psychology and economics in order to amplify the psychological content of Minskys account of the behaviour which leads up to financial turmoil, and market responses to it. In exploring recent developments in behavioural finance, the author finds that a crucial element is given inadequate attention: the motivation for action under uncertainty. Yet earlier traditions in economic thought (notably the Scottish Enlightenment thought) incorporated the role of psychological motivation under uncertainty. One can see this emerging again in Keyness analysis of financial behaviour, and again in Minskys financial instability hypothesis. The methodological features of their economic analysis are explored which allow this crucial psychological input to be present, focusing in particular on the role and meaning of rationality.