EMOTIONAL FINANCE: AS A NEW APPROACH TO UNDERSTANDING THE MARKETS

Asiye Nur DUMANLI; Selim AREN

doi:10.15637/jlecon.8.2.03

Authors

Asiye Nur DUMANLI Merkezi Kayıt Kuruluşu A.Ş./TURKEY https://orcid.org/0000-0002-0488-5315
Selim AREN Yıldız Teknik University/TURKEY https://orcid.org/0000-0003-1841-0270

DOI:

https://doi.org/10.15637/jlecon.8.2.03

Keywords:

Emotional Finance, Narrative, Group Feel, States of Mind, Phantastic Object

Abstract

The emotional finance theory was developed as an alternative to the mainstream theories which claim that markets are driven by investors’ conscious processes. Based on psychoanalysis, it searches the role of both conscious and unconscious processes in investment decisions. It offers new explanations regarding the causes and forecasting of the crises and bubbles that have been experienced frequently especially since the 2000s. In this framework, it makes use of concepts such as narrative, group feel, states of mind, and phantastic object, which have not been previously included in finance studies to date. This study represents the most comprehensive literature study carried out in the field of emotional finance to date. It analyses and models the fundamental components of the theory in the context of their determinants and effects. It offers findings to help market regulators, fund managers and investors understand the bubbles that occur in the markets.

Downloads

Download data is not yet available.

References

AKERLOF, G. & SHILLER, R.J (2009). Animal Sprits, Scala Publications: İstanbul

AREN, S. & NAYMAN HAMAMCI, H. (2020), "Emotional finance: determinants of phantasy", Kybernetes, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/K-02-2020-0084

BAUMEISTER, R. F. & NEWMAN, L. S. (1994). How stories make sense of personal experiences: Motives that shape autobiographical narratives. Personality and Social Psychology Bulletin, 20(6), 676–690

BELLOTTI, X. A., TAFFLER, R. J., & Tian, L. (2010). Understanding the Chinese Stockmarket bubble: The role of emotion. SSRN Electronic Journal. doi: 10.2139/ssrn.1695932

BLASCO, N., CORREDOR, P., & FERRERUELA, S. (2012). Does herding affect volatility? Implications for the Spanish stock market. Quantitative Finance, 12(2), 311–327

BRUNER, J. (1991). The narrative construction of reality. Critical Inquiry, 18(1), 1–21

CHONG, K. & TUCKETT, D. (2015). Constructing conviction through action and narrative: how money managers manage uncertainty and the consequence for financial market functioning. Socio-Economic Review, 13(2), 309-330

CRAMER, P. (1991). The Development of Defense Mechanisms. Theory, Research, and Assessment. New-York: Springer.

DUMANLI, A. N. & AREN, S., (2019). The role of narratives in financial decision making: Narratives from the perspective of emotional finance . 15TH International Strategic Management Conference, Poznan, Poland, 533-542.

ESHRAGHI, A., & TAFFLER, R. (2012). Hedge funds and unconscious fantasy. Accounting, Auditing & Accountability Journal, 25(8), 1244–1265.

ESHRAGHI, A. & TAFFLER, R. (2015). Heroes and victims: Fund manager sensemaking, self-legitimation and storytelling. Accounting and Business Research, 45 (6-7), 691-714.

FENZL, T. & PELZMANN L. (2012). Psychological and social forces behind aggregate financial market behavior. Journal of Behavioral Finance, 13(1), 56-65

GRIFFIN, E.M. (2012). A First Look At Communicatıon Theory. Published by McGraw-Hill, Eighth Edition

HART, P. (1991). Irving L. Janis victims of groupthink. Political Psychology, 12(2), 247.

HENTSCHEL, U., SMITH, G., DRAGUNS, J.G. & EHLERS, W. (2004). Defense Mechanisms in the Clinic, the Laboratory, and the Social World: Toward Closing the Gaps, Elsevier B.V.

HUPRICH, S. K., & GREENBERG, R. P. (2003). Advances in the assessment of object relations in the 1990s. Clinical Psychology Review, 23(5), 665–698.

JAVAIRA, Z., & HASSAN, A. (2015). An examination of herding behavior in Pakistani stock market. International Journal of Emerging Markets, 10(3), 474–490.

KNIGHT, F. H., (1921). Risk, Uncertainty and Profit. Boston: Houghton Mifflin.

MCCAULEY, C. (1998). Group dynamics in Janis’s theory of groupthink: Backward and forward. Organizational Behavior And Human Decision Processes, 73(2-3), 142–162

NYMAN, R. (2015). An Algorithmic Investigation of Conviction Narrative Theory: Applications in Business, Finance and Economics (Ph. D. Thesis). University College London, The Department of Computer Science.

NYMAN, R., KAPADIA, S., TUCKETT, D., GREGORY, D., ORMEROD, P. & SMITH,R. (2018). News and narratives in financial systems: exploiting big data for systemic risk assessment. Bank of England, Staff Working Paper No.704

OCHS, E. & CAPPS, L. (1996). Narrating the self. Annual Review of Anthropology, 25, 9-43.

ORMEROD, P., NYMAN, R., & TUCKETT, D. (2015). Measuring Financial Sentiment to Predict Financial Instability: A New Approach based on Text Analysis. arXiv: General Finance.

SCHARFSTEIN, D. & STEIN, J. (1990). Herd behavior and investment, The American Economic Review, 80 (3), 465-479.

SHILLER, R. J. (2017). Narrative economics. SSRN Electronic Journal, doi: 10.2139/ssrn.2896857

SPILLIUS, E. B. (2001). Freud and Klein on the concept of phantasy. The International Journal of Psychoanalysis, 82(2), 361–373.

TAFFLER, R. (2014). Emotional Finance: Theory and Application. WBS Working Paper

TAFFLER, R. (2018). Emotional finance: Investment and the unconscious, The European Journal of Finance, 24 (7-8), 630-653

TAFFLER, R. J., & TUCKETT, D. A. (2011). Emotional finance: The role of the unconscious in financial decisions. Behavioral Finance, 95–112.

TAFFLER, R. J., SPENCE, C., & ESHRAGHI, A. (2017). Emotional economic man: Calculation and anxiety in fund management. Accounting, Organizations and Society, 61, 53–67.

TUCKETT, D. (2011). Minding the Markets an Emotional Finance View of Financial Instability. UK: Palgrave Macmillan.

TUCKETT, D., & TAFFLER, R. (2008). Phantastic objects and the financial market’s sense of reality: A psychoanalytic contribution to the understanding of stock market instability. The International Journal of Psychoanalysis, 89(2), 389–412

TUCKETT, D. (2012). Financial markets are markets in stories: Some possible advantages of using interviews to supplement existing economic data sources. Journal of Economic Dynamics & Control, 36, 1077 -1087

TUCKETT, D. & TAFFLER, R. (2012). Fund Management: An Emotional Finance Perspective. CFA Institute.

TUCKETT, D., SMITH, R. E., & NYMAN, R. (2014). Tracking phantastic objects: A computer algorithmic investigation of narrative evolution in unstructured data sources. Social Networks, 38, 121–133.

TUCKETT, D., MANDEL, A., MANGALAGIU, D., ABRAMSON, A., HINKEL, J. (2015). Uncertainty, Decision Science, and Policy Making: A Manifesto for a Research Agenda. Critical Review: A Journal of Politics and Society, Taylor and Francis 2015, 27 (2), pp.213 - 242.

TUCKETT, D. & NIKOLIC,M. (2017). The role of conviction and narrative in decision-making under radical uncertainty. Theory & Psychology, 27(4), 501–523.