The emotional business of finance Prof. Mark Fenton-O’Creevy Phineas Gage (1823- 1860) Advances in neuroscience research Amygdala Hippocampus A dual process view of cognition Facts Reasoning strategies Options for decision Decision Representation of future outcome Activation of biases related to previous emotional experience of comparable situations Bechara, A., Damasio, A., Tranel, D., & Damasio, A. R. 1997. Deciding advantageously before knowing the advantageous strategy, Science, Vol. 275. Situation Trader Trader Manager Different categories of emotion in traders decision-making • Interaction between mood and trading • Intuition: it feels like the right answer • Empathy: a sense for what other market players are feeling Emotional self-regulation (Low performers) • I’m bit of a cold fish; I don’t think emotions greatly affect my decision making. If you are making money, you are achieving your objective.… [But later] • …When you lose money, it can be horrendous, violent mood swings. You don’t know what to do when you lose money… Managers on the desk are an added pressure, and my colleagues, so this emotion can encourage you to make decisions more quickly.… It is important to have a recovery period from losses to be more emotionally stable before you go back in [to trading]. • I think there is, [a strong emotional element to trading] I think that anyone who’s doing it properly and has got their head screwed on is doing everything they can consciously to overrule that, and if I feel that I’m trading emotionally I will walk off the desk, have a glass of water, walk up and down the street and then come back and make decisions when I’m hopefully not emotional. Emotional self-regulation (High performers) Emotion and rationality are not at opposite ends, they co-exist the entire time. You buy in at 50, they go to 48, you refuse to believe it. Your rational side says you’ve got it wrong. Your emotional side says the market is wrong so you buy some more. They go to 46; you’re really pissed off now, you’re not going to sell them, you’re not going to take this. They go to 42 your rational side kicks in and says I got this wrong and I am out and it doesn’t necessarily - I am not suggesting it happens in that sequence every time but the two always co-exist. The two always co-exist. Big losses and big gains can swap around fairly quickly and once you understand that then you stop concentrating on the loss and you start concentrating more on how to make money back. … One big trade is not going to make anyone and one big loss doesn’t destroy you. Bringing the data together Key findings • Emotions play a role both beneficial and adverse in the financial decision making of finance professionals • Effective management of emotions is associated with improved performance • Improved self-regulation of emotions can be trained • This all turns out to be true for private investors but more so. But what about consumers? Impulsive buying: a consumer's tendency to buy spontaneously, unreflectively and, immediately, (Rook & Fisher, 1995) I often buy things spontaneously. "Just do it" describes the way I buy things I often buy things without thinking "I see it, I buy it" describes me "Buy now, think about it later" describes me. Key findings • We can understand impulsive buying as a form of maladaptive emotion regulation to promote good feelings and repair bad feelings • Impulsive shopping has significant adverse financial consequences. • Retailers invest significant resources in engaging with our emotions to promote impulsive buying (“Because you are worth it”) – perhaps we need an investment in education which promotes emotional literacy about money Attitudes to money • • • • Money as power Money as love Money as freedom Money as security • Strong relationship to financial outcomes A final observation • Policy makers often seek to influence behaviour by providing information • Firms, through advertisements often seek to influence behaviour through engaging with emotions • Guess who is more pessimistic about affecting consumer behaviour?