Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

‘Emotional inflation’ leads to stock market meltdown

30.04.2008
Investors get carried away with excitement and wishful ‘phantasies’ as the stock market soars, suppressing negative emotions which would otherwise warn them of the high risk of what they are doing, according to a new study led by UCL (University College London).

Economic models fail to factor in the emotions and unconscious mental life that drive human behaviour in conditions where the future is uncertain says the study, which argues that banks and financial institutions should be as wary of ‘emotional inflation’ as they are fiscal inflation.

The paper, published in this month’s issue of the International Journal of Psychoanalysis, explores how unconscious mental life should be integrated into economic decision-making models, where emotions and ‘phantasies’ – unconscious desires, drives and motives – are among the driving forces behind market bubbles and bursts.

Visiting Professor David Tuckett, UCL Psychoanalysis Unit, says: “Feelings and unconscious ‘phantasies’ are important; it is not simply a question of being rational when trading. The market is dominated by rational and intelligent professionals, but the most attractive investments involve guesses about an uncertain future and uncertainty creates feelings. When there are exciting new investments whose outcome is unsure, the most professional investors can get caught up in the ‘everybody else is doing it, so should I’ wave which leads first to underestimating, and then after panic and the burst of a bubble, to overestimating the risks of an investment.

“Market investors’ relationships to their assets and shares are akin to love-hate relationships with our partners. Just as in a relationship where the future is unexpected, as the market fluctuates you have to be prepared to suffer uncertainty and anxiety and go through good times and bad times with your shares. You can adopt one of two frames of mind. In one, the depressive, individuals can be aware of their love and hate and gradually learn to trust and bear anxiety. In the other, the paranoid schizoid, the anxiety is not tolerated and has to be detached, so the object of love is idealised while its potential for disappointment is ‘split’ off and made unconscious.

“What happens in a bubble is that investors detach themselves from anxiety and lose touch with being cautious. More or less rationalised wishful thinking then allows them to take on much more risk than they actually realise, something about which they feel ashamed and persecuted, but rarely genuinely guilty, when a bubble bursts. Again, like falling in idealised love, at first you notice only the best qualities of your beloved, but when everything becomes real you become deflated and it is the flaws and problems that persecute you and which you blame.

“Lack of understanding of the vital role of emotion in decision-making, and the typical practices of financial institutions, make it difficult to contain emotional inflation and excessive risk-taking, particularly if it is innovative. Those who join a new and growing venture are rewarded and those who stay out are punished. Institutions and individuals don’t want to miss out and regulators are wary of stifling innovation. If other investors are doing it, clients might say ‘why aren’t you doing it too, because they’re making more money than we are’.”

Jenny Gimpel | alfa
Further information:
http://www.ucl.ac.uk/media/library/stockmarket

More articles from Business and Finance:

nachricht Microtechnology industry is hiring – positive developments of past years continue
09.04.2018 | IVAM Fachverband für Mikrotechnik

nachricht RWI/ISL-Container Throughput Index with minor decline on a high overall level
20.03.2018 | RWI – Leibniz-Institut für Wirtschaftsforschung

All articles from Business and Finance >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: TU Graz Researchers synthesize nanoparticles tailored for special applications

“Core-shell” clusters pave the way for new efficient nanomaterials that make catalysts, magnetic and laser sensors or measuring devices for detecting electromagnetic radiation more efficient.

Whether in innovative high-tech materials, more powerful computer chips, pharmaceuticals or in the field of renewable energies, nanoparticles – smallest...

Im Focus: Tailored light inspired by nature

An international research team with Prof. Cornelia Denz from the Institute of Applied Physics at the University of Münster develop for the first time light fields using caustics that do not change during propagation. With the new method, the physicists cleverly exploit light structures that can be seen in rainbows or when light is transmitted through drinking glasses.

Modern applications as high resolution microsopy or micro- or nanoscale material processing require customized laser beams that do not change during...

Im Focus: NYUAD astrophysicist investigates the possibility of life below the surface of Mars

  • A rover expected to explore below the surface of Mars in 2022 has the potential to provide more insights
  • The findings published in Scientific Reports, Springer Nature suggests the presence of traces of water on Mars, raising the question of the possibility of a life-supporting environment

Although no life has been detected on the Martian surface, a new study from astrophysicist and research scientist at the Center for Space Science at NYU Abu...

Im Focus: Manipulating non-magnetic atoms in a chromium halide enables tuning of magnetic properties

New approach creates synthetic layered magnets with unprecedented level of control over their magnetic properties

The magnetic properties of a chromium halide can be tuned by manipulating the non-magnetic atoms in the material, a team, led by Boston College researchers,...

Im Focus: A new method to significantly increase the range and stability of optical tweezers

Scientists of Tomsk Polytechnic University jointly with a team of the V.E. Zuev Institute of Atmospheric Optics of the Siberian Branch of the Russian Academy of Sciences have discovered a method to increase the operation range of optical traps also known

Optical tweezers are a device which uses a laser beam to move micron-sized objects such as living cells, proteins, and molecules. In 2018, the American...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

VideoLinks
Industry & Economy
Event News

“Conference on Laser Polishing – LaP 2020”: The final touches for surfaces

23.07.2020 | Event News

Conference radar for cybersecurity

21.07.2020 | Event News

Contact Tracing Apps against COVID-19: German National Academy Leopoldina hosts international virtual panel discussion

07.07.2020 | Event News

 
Latest News

Novel approach improves graphene-based supercapacitors

03.08.2020 | Information Technology

Germany-wide rainfall measurements by utilizing the mobile network

03.08.2020 | Information Technology

Drug discovery: First rational strategy to find molecular glue degraders

03.08.2020 | Life Sciences

VideoLinks
Science & Research
Overview of more VideoLinks >>>