Behavioral finance FAQ / Glossary (Emotion)
This is a separate page of the E section of the Glossary
Dates of related message(s) in the
Behavioral-Finance group (*):
Year/month, d: developed / discussed,
05/9d - 08/3i,5i (prior data
were lost) + see emotional bias,
emotional reasoning, sentiment,
affect, mood, neuroeconomics
What are emotions?
Gentle and humble citizens of our heart?
Or powerful governors of our mind?
Better let us watch our emotions!
This article takes the example of economic behaviors
Watch it when our emotions manage our money.
And when collective emotions invade financial markets.
Emotions are painful or pleasurable feelings
occupying the mind or originated from it (*).
They contribute to a person's motivations
and thus affect its decisions.
(*) thus going farther than a purely physical / sensorial feelings
Body and mind, feelings and emotions
Are you a cold blood fish in the stock pond?
Or does your pulse quicken when you buy or sell stocks?
* feelings (sensorial stuff)
* and emotions (mental stuff)
be related ?
A feeling can be caused by
Either a physical / sensorial stimulus (cold, heat, bruise..).
Normally, emotions are not involved here.
Or an outside psychological or social stimulus.
Here we have pure emotions
For example emotions can be reactions to other people
behaviors or statements.
They induce love or hate towards them for
The process is not only mental, but also physical, a pulse
Or even a self-generated inner mental
stimulation, an expected pleasure (= desire)
or pain (= aversion).
Here also we have emotions and their physical
Another thing is that:
Feelings apparently limited to the body can deeply influence
Some physical exercises (breathing, smiling...) might be the best
tool for emotion control, for example to fight stress or negative
Why not use them to get a dispassionate
mind before buying or selling stocks?
And vice versa: emotional shocks and lasting emotional pains
might favor some illnesses.
Types of emotions
The map of emotions.
There are many types of emotions as sources of motivations, they range:
From basic emotions / instincts (hope, fear...)
To social emotions (love, admiration,
And many others.
To simplify something much more complex (see neurosciences), every
emotion category seems to:
Relate to a phase of the animal and human evolution,
Take place through specific brain locations and electrical or chemical
Emotions interact with reflexive and cognitive functions, which also
occupy their own "office space" in that "building" that is the human brain.
Emotions come in all shapes and colors.
Although the definitions are not too precise, as every school of
psychology carries proudly its own, emotions follow various forms:
They become the "affect" when the person expresses emotions,
is conscious of them, and feels direct pleasure or suffering
They are "sentiments" when they get deeply ingrained and often
less conscious. That is why some psychologists differentiate
* emotions that are just linked to reactions,
* from sentiments as being deeper phenomena.
Paradoxically, they are also called sentiments when
they relate to a temporary
optimistic or pessimistic attitude /
Emotions / moods are either individual or collective.
The same than individual people can generate their own hopes
and fears and many other emotions, groups and societies can
and create their own also.
Here we have (social) mood, (market) sentiment: see the
Crowds are particularly emotional, often more than isolated
Emotions / moods, whether individual or collective, are also either
acute or diffuse.
The role of emotions in human decisions
Moody or happy decisions.
Why I did it, Inspector?
Just ask my amygdala and measure my dopamine.
Neuroscience (*), an increasingly important research field, has
confirmed the crucial role of emotions on decision-making
and more generally on behavior.
Emotions play the role of a
"pain avoiding / pleasure seeking"
This role associated to feelings is often
as important, maybe more, than the
part played by pure cognition
(*) Experiments in neuroscience, specially in
neuroeconomics and neurofinance (see those words), based
essentially in measuring the activity of brain areas, chemical
inner secretions and electric connections.
Some biological mechanisms seem to "instinctively" give the lead to
brain sectors that deal with emotions, over other mechanisms that
try to give the leadership to reasoning brain sectors.
Armies of neurons from different brain areas are always ready to
fight (but also join) one another. "Tempest under a skull", as Victor
Some psychologists see a primacy of emotions
in many human decisions.To simplify, "emotional neurons" (in the brain amygdala...),
helped by "emotional hormones" (adrenaline, dopamine...),
often win the brain battle.
This occurs particularly in case of affect heuristics, when
somebody thinks and decides on the basis of his current mood
that he considers as "instinct".
.(**) It could also be said that emotions are components of
This primacy is not so clear cut, as a difference (time / space
distortion?) can be made between:
Short term decisions, in which emotions (and some
automaticity) play an important part and people tend to decide
in a rush according only to how they feel.
Long term decisions, based more often on cognition
(knowledge, facts, logic) - either rational or distorted
(see cognitive bias).
Emotions have positive and negative aspects
in decision making
Can subjectivity be ...objective?
While logic and reason are objective processes that are normally independent
of the person, emotions are subjective.
Emotions are forms of energy.
That is why sometimes "emotional" is confused with
"irrational" and poorly adapted to situations.
This is reductive as emotions are normal ingredients in human
decisions and actions and can be quite productive.
Energy can be constructive or destructive.
Whatever the automaticity of some of their behaviors (see
"autopilot"),human beings are not just cold mechanical devices.Emotions are usually needed to drive their actions.
A lack of emotion kills the desire to act.
On the other hand too strong emotions, expressing excessive pain
or elation, can overwhelm rational thinking and wisdom.
Let us see more closely those effects of emotions
They are powerful agents to make people act and
Affective factors are what motivates human beings
They are not inert and passive beings, like pure spirits
Some emotions are positive, depending on their orientation and
degree of openness to reality.
For example, there would be few economic advances
withoutsome greed, optimism, or other emotions,
to motivate it.
Also "emotional intelligence" (see the related article) helps to
On the other hand, emotions, when biased (see below
emotional bias") are (even more than cognitive biases) sources of
But of course, emotions are counterproductive only when they
are illusory, excessive, or plainly negative and destructive.
However useful are our emotions, better learn to
take some distance from them.
For example, in money management, a
distance from greed, fear and mimicry.
This supposes not to be blinded by
pain or pleasure (*)
when making decisions
(*) not to forget reflexes and habits)
As it is popularly known (but not always practiced),
to keep a cool mind helps to stay rational and
disciplined (see discipline, willpower).
This is crucial in many life activities, for example
in money management.
Maybe some mental anti-stress can help...
Dates of related message(s) in the
Behavioral-Finance group (*):
Year/month, d: developed / discussed,
05/9d (prior data were lost) -
08/1i + see emotion, emotional
reasoning, sentiment, affect,
(social) mood, neuroeconomics
- When emotions cannot be trusted
An emotional bias (*) takes place when emotions
lead to irrationalities such as a wrong understanding
of situations and errors in decision making.
(*) The other category of biases are cognitive biases, see below
A difference might be done between
A positive emotional bias, as an unjustified / illusory
A negative one as an unjustified / maladapted painful
Biased emotional / affective reactions, whether
positive or negative, can override rational thinking
and bring harmful extreme behaviors (overreaction,
Cognition, emotion, intelligence, bias
When mind and heart are connected.
There is some interference between
cognitive biases and emotional biases.
For example, some cognitive biases are caused by emotional
lacks of attention, by which emotions take the lead over cognition.
Also, even very brilliant and learned people can make
big mistakes, as they leave some emotion take control.
Greed, fear or whatever other emotion take over their mind and
change their appreciation of realities.
On the other hand, emotions are not always sources of "biases".
Some emotions, directed to aesthetics, curiosity or
ethics / generosity have their own rationality (*)
even if they get in the path of cold, self-centered
Material goals and self-interest are not the only worthy motivators in
Some "social emotions" such as love might fight some more basic
emotions such as fear.
Emotional intelligence (see that phrase) is supposed to be a
(*) But not always, as emotions can sometimes be also sources
of illusions and perverse effects.
Impact of emotional biases in finance
and economics (see neuroeconomics)
Does money inspire love / hate feelings?
For investors (or consumers, borrowers...), the best
known and most influential emotions that can lead to biased
decisions are the famed greed (or exacerbated hope)
But there are myriads others, from hate to admiration towards some
assets,from pleasure to suffering in the buying or selling act, etc.
Some neuroscience / neurofinance experiments have shown that
people with psychopath traits, namely who are emotionless (neither
paralyzed by fear nor carried away by greed), obtain better market
trading performances than the average.
Those "emotional highs", which can become addictive, and also some
calmer - but deeply ingrained - sentiments, affect price variations when they
generalize to many traders. They either exacerbate or erode their market
Now the S... word
Is this what is called hot money?
Talking about emotions, the sexual urge, that has important
consequences in other life areas, doesn't seem to affect financial
Unless we consider that the ever present mimicry / herding
is linked to mating attraction (see "genetic utility").
Also unless we assimilate to orgasm (the same sector of the brain
seems involved), an extreme feeling of pleasure that we feel
when deciding to buy or sell (some neurofinance studies has
shown that effect among traders).
In such cases we are talking not only about sentiments and
emotion, but also about "basic instincts".
Other neurofinance experiments have detected that to show some
nicely shaped person to a male trader diverts his attention making
him less wary in its market decisions.
Well, advertising people have understood long how to use "sex and
Emotional intelligence / literacy / reasoning
05/9d (prior data were lost)
+ see emotion, emotional bias,
sentiment, affect, (social)
Did not Confucius told that Behavioral finance
is the best way to master emotional intelligence?
Just because BF teaches what makes investors tick!
Emotional intelligence / literacy is the awareness and
understanding of emotional phenomena, so has to take them into
account in decision making and make them manageable.
This applies as well to the person's own sentiments as to those it
perceives in other people.
Emotional reasoning is the mental process that is at play when we decide
or argue on the basis of what we feel.
It might sometimes, actually often, go against rationality (see emotional bias).
But some emotions are needed motivators for decisions and
Emotional reasoning might have its own rationality and might not always
be a source of "biases" (see above "emotional bias").
It can help to understand other people's motivations, and it can have
Emotional intelligence: a balancing act
People have several inner energy sources to fuel their
Here is what we can call the human decision pentagon (or
1) Their reason (see "rational"),
2) Their heart ("social emotions"),
3) Their guts or instincts / intuitions,
4) Their habits and reflexes (autopilot)
5) Their soul or conscience, whatever that is
(philosophers have plenty of definitions).
People have constantly to manage the whole grid and make "arbitrages"
(trade off) between those sources.
Consciousness (and self-control) is the key
for this management.
It helps find the right balance between for example,
Excessive gut reaction or knee-jerk reflex, which can bring stupid
Excessive thinking, which can bring indecision,
Excessive logic, which can bring havoc by hiding side aspects,
human uncertainties or practical constraints
Excessive trust in "good" habits, that can become maladapted to
Uneducated good intentions, of which the hell is paved, as the
See a practical trick to control ones emotions, and the mind process
(*) To find those messages: reach that BF group and, once there,
1) click "messages", 2) enter your query in "search archives".
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