Emotional Factors

&
Social Forces
 Flow of Presentation
MFM 2016-19 _ Batch II _ Sem –IV _Sub-Behavioural Finance _ Prof- Dr. R Sardesai
 7.1 Substance of Emotion

Sandra Hockenbury
Emotion as a complex physiological state

a subjective experience

a physiological response

expressive response

Feelings -- subjective representation of emotions

Moods – diffused affective and less intense than emotions

Affect – encompasses emotion, feeling , and moods

 7.1 Substance of Emotion

John Elster six observable features of emotion

1. Cognitive antecedents

2. Intentional objects

3. Physiological arousal

4. Physiological expressions

5. Valence Emotions
6. Action tendencies

Negative Positive
 7.2 Theories of Emotions
 Cognitive Errors
Cognitive Errors deal with how people think and result
from memory and information-processing errors and
are, therefore, the result of faulty reasoning

 Emotional Biases
Emotional biases are the result of reasoning influenced
by feelings.
7.3 Evolutionary perspective on emotions
 Darwin researched the expression of emotions in an effort
to support his theory of evolution in the 19th century
 He proposed that much like other traits found in animals,
emotions also evolved and were adapted over time
 According to modern evolutionary theory, different
emotions evolved at different times
 Primal emotions, such as fear, are associated with ancient
parts of the brain and presumably evolved among our
premammal ancestors
 Social emotions, such as guilt and pride, evolved among
social primates.
 Evolutionary perspective on
emotions - impact on finance
 The Central assumption of the traditional finance model is that
people are rational.
 Standard Finance theories are based on the premises that investor
behaves rationally and stock and bond markets are efficient.
 As the financial economist were assuming that people(investors)
behaved rationally when making financial decisions, psychologists
have found that economic decision are made in an irrational
manner
 Cognitive error and extreme emotional bias can cause investors to
make bad investment decisions, thereby meaning that they act in
irrational manner.
7.4 Types & Dimensions of Emotions
 Plutchik’s wheels of emotions – There are 8 primary
emotions Joy , Trust, Fear, Surprise, Sadness,
Anticipation, Anger & disgust
 Each one has polar opposite
1. Joy – Sadness
2. Fear – Anger
3. Trust - Disgust
4. Surprise- Anticipation
Continued…
Intensity of
emotions increases
as it moves toward
the centre of wheel
and decreases as it
moves outwards
Continue

Emotional experience measured in two dimensions

1. Valence ( How negative or positive experience feels.)
2. Arousal ( How energizing enervating the experience feels)
Emotions & Affective emotions
 According to neuroscientist there are seven primal &
Affective emotions
 7.5 Emotional style
 Resilience style - Setback with determination (recover
quickly) or simply surrender helplessly (recovers
slowly)
 Outlook style – look at brighter side (positive types) or
pessimistic (negative types)
 Social Intuitional style – Can figure out body language
or voice tone (Social intuitive style) or puzzled by
outward manifestation (Social puzzled style)
 Self awareness style – Aware of thoughts & feeling
tuned with body language or Act or react without
knowing his conscious.
Continued…
 Sensitivity to context style – Follow Conventional rule
(Sensitive to context ) or baffled when someone points
out inappropriate behavior (tuned out).
 Attention style – Filter out emotions and stay focused
(Focused people) or Focus diverts frequently
(Unfocused people)
 Each person is unique & it’s a combination of all the
dimensions. Numerous ways to combine all the
dimensions and so countless emotional styles.
Illustrative emotional style as below
7.6 Emotions & Investing
 Emotions have a bearing on risk tolerance,
and risk tolerance influences portfolio
selection.
 Investors experience a variety of emotions
as they consider alternatives, decide how
much risk to take, watch their decisions play
out, assess whether the initial strategy needs
modification, and finally learn how far they
have succeeded in achieving their financial
objectives.
Emotional Timeline
 The emotions experienced by a person with
respect to investment may be expressed
along an emotional time line as shown
below.
How to avoid emotional investing
 Establish Long-term Financial Goals
 Find a balanced approach
 Be Completely Diversified
 Don’t Be Afraid to Lose
 Use News for Information, Not for
Decisions
 Don’t Be a Sheep and Follow the Herd
How to avoid emotional investing
 Remove Personal Feelings From Your
Investments – They Don’t Have Feelings for
You
 Remember Past Performance Does Not
Equal Future Performance
 Be Obnoxiously Prescriptive and Don’t
Deviate From Your Method
7.7 Fairness, Reciprocity and Trust
 Trust is the prerequisite for an efficiently
functioning of the Economy.
 The cost of business and personal transactions
are reduced if people trust each other and
treat each other fairly.
 Example: People give tips in the restaurant as
long as the service is above the threshold
level. People do it out of sense of fairness.
 Important - Games/ Experiments
Ultimate Game Dictator Game The Trust Game
Audience  4 Participant are divided equally in two  Each Room A Participant
Rooms A & B (Unknown identity) (Investor) paired with
Room B (Trustee)
Format  Each Participant in Room A is given Rs.  Similar to Ultimate  Each Participant given Rs.
1000 and asked to send any portion of the game, except that the 1000
money to any participant in Room B division proposed by  Investors can send any
 The responder can choose to accept of Proposers is Final. amount of the money to
reject the offer  Room B – No decision Trustee
 If accepted, the accepted money is given to make  Each rupee sent to
to responder and Room A proposer keeps Trustee is Multiplied
the remaining money three times
 If rejected by responder of Room B, no one  Trustee can decide how
gets any money much to keep and how
much to send back
Results  Typically 50% rejects are for offer less then  33% make positive  Investors send 50% of the
20% of the amount. make positive, even money to the Trustee
 First responder rejects positive offer, and though they are final  Typically, Trustee return
second proposers send more then the decision makers 50% of the money they
minimum offer – suggesting they want to  People value fairness receive most of the time
be fair.  Implying – Trust does not
pay for investors
Fairness, Reciprocity and Trust
 Altruism – Employees are more productive. It
increasing your overall well being.
 Social Behavior and Emotion
 Social Behavior and Evolution
7.8 Conformity
7.9 Social Influence
 Reciprocation
 Social Proof
 Liking
 Obedience to Authority
 Scarcity
7.10 Social Influence on investment
& Consumption
Thank You