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The Influence of Affect on Beliefs, Preferences, and Financial Decisions

Published online by Cambridge University Press:  18 February 2011

Camelia M. Kuhnen  and
Brian Knutson
Camelia M. Kuhnen
Affiliation:
Kellogg School of Management, Northwestern University, 2001 Sheridan Rd., Evanston, IL 60208. [email protected]
Brian Knutson
Affiliation:
Department of Psychology, Stanford University, 470 Jordan Hall, Stanford, CA 94305. [email protected]
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Abstract

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Neuroeconomics research shows that brain areas that generate emotional states also process information about risk, rewards, and punishments, suggesting that emotions influence financial decisions in a predictable and parsimonious way. We find that positive emotional states such as excitement induce people to take risks and to be confident in their ability to evaluate investment options, while negative emotions such as anxiety have the opposite effects. Beliefs are updated so as to maintain a positive emotional state by ignoring information that contradicts individuals’ prior choices. Marketplace features or outcomes of past choices may change emotions and thus influence future financial decisions.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 46 , Issue 3 , June 2011 , pp. 605 - 626
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2011

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