Perceived and actual risk in financial markets: insights from emotional finance
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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.
For further information / press enquiries, contact:
Liz Alvey, Marketing Officer
School of Management
University of Bath
Claverton Down
Bath BA2 7AY
UK
Tel:+ 44 (0) 1225 386856
Email: pr@management.bath.ac.uk
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