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Emotions, Bayesian Inference, and Financial Decision Making

Salzman, Diego and Trifan, Emanuela (2006):
Emotions, Bayesian Inference, and Financial Decision Making.
Darmstadt, In: Darmstadt Discussion Papers in Economics, [Online-Edition: http://econstor.eu/bitstream/10419/32092/1/511221452.PDF],
[Report]

Abstract

This paper presents a model in which rational and emotional investors are compelled to make decisions under uncertainty in order to ensure their survival. Using a neurofinancial setting, we show that, when different investor types fight for market capital, emotional traders tend not only to influence prices but also to have a much more developed adaptive mechanism than their rational peers, in spite of their apparently simplistic demand strategy and distorted revision of beliefs. Our results imply that prices in financial markets could be seen more accurately as a thermometer of the market mood and emotions rather than as simple informative signals as stated in traditional financial theory.

Item Type: Report
Erschienen: 2006
Creators: Salzman, Diego and Trifan, Emanuela
Title: Emotions, Bayesian Inference, and Financial Decision Making
Language: English
Abstract:

This paper presents a model in which rational and emotional investors are compelled to make decisions under uncertainty in order to ensure their survival. Using a neurofinancial setting, we show that, when different investor types fight for market capital, emotional traders tend not only to influence prices but also to have a much more developed adaptive mechanism than their rational peers, in spite of their apparently simplistic demand strategy and distorted revision of beliefs. Our results imply that prices in financial markets could be seen more accurately as a thermometer of the market mood and emotions rather than as simple informative signals as stated in traditional financial theory.

Series Name: Darmstadt Discussion Papers in Economics
Volume: 166
Place of Publication: Darmstadt
Uncontrolled Keywords: Judgement under uncertainty, Bayesian Inference, Behavioral Finance, Decision Making, Emotions
Divisions: 01 Department of Law and Economics
01 Department of Law and Economics > Volkswirtschaftliche Fachgebiete
Date Deposited: 20 Nov 2008 08:25
Official URL: http://econstor.eu/bitstream/10419/32092/1/511221452.PDF
Additional Information:

JEL classification: G1

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