Emotional finance and the psychodynamics of markets

Abstract

Little attention is paid in the finance literature to how people’s unconscious fantasies, needs and desires help drive their investment decisions, and markets more generally. Some of the theory underpinning the new domain of emotional finance, which is informed by the psychoanalytic understanding of the human mind and group processes, is first outlined. This is then applied in helping explain asset pricing bubbles and the global financial crisis, as well as the paradox the asset management industry itself represents, all of which conventional finance theory finds difficulty in explaining in any convincing way. The paper concludes by suggesting that were we to recognise more formally the key role our inner world plays in the workings of financial markets, destructive and potentially pathological outcomes might be ameliorated