University of Bath School of Management University of Bath School of Management

Perceived and actual risk in financial markets: insights from emotional finance

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Dr Richard Fairchild

At a time of great nervousness in global financial markets, the School of Management’s Dr Richard Fairchild has been looking carefully at the importance of human emotions in investment and finance decisions.

Together with former hedge fund manager, Nick Bullman, Dr Fairchild has written a Thinkpiece article for the Chartered Insurance Institute entitled: Perceived and actual risk in financial markets: insights from emotional finance. The article explores some of the new theories about human choices in financial services, delving into the area of behavioural finance.

Behavioural finance has, during the last twenty years, helped us to move from a very limited understanding of human choices in financial services to a much clearer understanding of what affects peoples’ decision making. Research has shown that, contrary to popular opinion, emotions have a very powerful part to play in the decisions investors make.

The old rational choice model assumes that financial market participants are fully rational, unbiased, emotionless self-interested maximisers of expected utility (with stable preferences).  Behavioural finance recognises that real-world actors may suffer from bounded-rationality, may have psychological biases, may be captive to emotions, and may not be maximisers of expected utility.

The focus of this article is on a further, recent exciting development: emotional finance. Emotional finance employs Freudian psychoanalysis to study the effects of investors' and managers' unconscious emotions on financial market behaviour. It shows that unconscious emotions may cause bubbles and extreme crashes at critical emotional tipping-points. Emotional finance emphasises the difference between actual and perceived risk.

Dr Fairchild has further contributed to developing investors’ understanding in this area by speaking at the Money Marketing Investment Alliance, where he shared the stage with David Smith, economics editor at The Sunday Times and author of The Rise and Fall of Monetarism and Chris Gilchrist, editor of the IRS Report. The conference was sponsored by: Baillie Gifford, Barings Asset Management, BlackRock, and Williams de Broë.

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General Notes For Editors:

The School of Management is one of the UK's leading business schools. Currently ranked 1st for Student Experience (Times Higher Education 2015) and 1st for Business Studies (The Times & Sunday Times University Guide 2016), we are a leading centre for management research - placed 8th in the UK in the latest REF2014.

We are one of a select number of international business schools accredited by EQUIS, the European Foundation for Management Development's quality inspectorate and the Bath MBA has been accredited by the Association of MBAs (AMBA) since 1976.

The centrality of research to teaching is an essential feature of all our programmes. The School offers a full range of programmes from undergraduate to postgraduate up to PhD level and post-experience programmes including the world-ranked Bath MBA. The School also provides tailored executive development programmes for middle and senior management.

The School of Management has a faculty of over 100 teaching and research staff, including visiting academics, with a professional support team of around 90 managerial and administrative staff. Research income averages £2 million per annum. There are approximately 2,400 students in total comprising some 150 MBA students, over 500 Master’s students, 250 full- and part-time research students, and over 1500 undergraduates following BSc degrees.