Behavioral finance FAQ / Glossary (Emotion)

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Dates of related message(s) in the
Behavioral-Finance group
(*):
Year/month, d: developed / discussed,
i: incidental

Emotion, emotional

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 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.


Definition:

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?

How can 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 example
The process is not only mental, but also physical, a pulse accelerator.

Or even a self-generated inner mental stimulation.

an expeced pleasure (= desire) or pain (= aversion).

Here also we have emotions and their physical expressions


Another thing is that:

Feelings apparently limited to the body can deeply influence the
    mind

Some physical exercises (breathing, smiling...) might be the best tool for
emotion control, for example to fight stress or negative feelings,

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, hostility ...)

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 electro-chemical connections

Emotions interact with reflexive and cognitive functions, which also occupy
their own "office space"
in that "building" that is the human brain.

Close notions

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 the emotions, 
    is conscious of it,
and feels direct pleasure or suffering because of it.


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 / mood
.


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 create their
own also.

Here we have (social) mood, (market) sentiment: see the related
articles.

Crowds are particularly emotional, often more than isolated
individuals.


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"
decision factors.

This role associated to feelings is often as important,
maybe more, than the part played by pure cognition

(*) Experiments in neuroscience, among them in neuroeconomics
       and neurofinance
(see those words), are based essentially in measuring
       the activity
of various brain areas and chemical inner secretions

that influence their 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 Hugo said.

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 battle.

This is particularly the case in case of affect heuristics, when somebody
thinks and decides on the basis of his current mood which he considers
as "instinct".

.(**) It could also be said that emotions are components of cognition.

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 (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.

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.

Emotions are forms of energy.
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 react.

Affective factors are what motivates human beings and
groups.
They are not inert and passive beings, like pure spirits or
computers.

Some emotions are positive, depending on their orientation and degree
of openness to reality.

For example, there would be few economic advances without
some greed, optimism, or other emotions, to motivate it.

Also "emotional intelligence" (see the related article) helps to behave
    efficiently,


On the other hand, emotions, when biased (see below

emotional bias") are (even more than cognitive biases) sources of
decision errors.

But of course, emotions are counterproductive only when they are
illusory, excessive, or plainly negative and destructive
.

Here an
advice:

Keep
cool!

 

 

 

 




 

 

 

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,
i: incidental

Emotional bias



05/9d (prior data were lost) - 08/1i
+ see emotion,  emotional
reasoning,
sentiment, affect, (social) mood,
neuroeconomics

When emotions cannot be trusted

Definition:

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 pleasant
            feeling

A negative one as an unjustified / maladapted painful feeling.

Biased emotional / affective reactions, whether positive or
negative, can override rational thinking and lead to damaging
extreme behaviors
(overreaction, underreaction).

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 "economic" rationality.


Material goals and self-interest are not the only worthy motivators in life.

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 balancing act.

(*) 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) and fear.

But there are myriads others, from hate to admiration towards ome 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 confidence.

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 decisions directly.

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 the market".

 

Emotional intelligence / literacy / reasoning

05/9d (prior data were lost)
+ see emotion, emotional bias,

sentiment, affect, (social) mood,
neuroeconomics

Did not Confucius told that Behavioral finance
is the best way to master emotional intelligence?

Just because BF teaches what makes investors tick!

Definitions:

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 actions.

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 positive effects,

Emotional intelligence: a balancing act

Smart feelings?

People have several inner energy sources to fuel their decision engine.

Here is what we can call the human decision pentagon (or alchemic
pentagram?):

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 moves,

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 new
   situations,

Uneducated good intentions, of which the hell is paved, as the saying goes.

See a practical trick to control ones emotions, and the mind process
     in general.

(*) To find those messages: reach that Behavioral-Finance group and, once there,
      1) click "messages", 2) enter your query in "search archives".

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on the glossary quality at Behavioral-Finance/polls

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This page last update: 24/05/14 

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