6th
Fear, Greed, and Financial Crises: A Cognitive Neurosciences Perspective
NYT
“Far be it from me to say that we ever shall have the means of measuring directly the feelings of the human heart. A unit of pleasure or of pain is difficult even to conceive; but it is the amount of these feelings which is continually prompting us to buying and selling, borrowing and lending, labouring and resting, producing and consuming; and it is from the quantitative effects of the feelings that we must estimate their comparative amounts.”
— William Stanley Jevons, British economist, in 1871.
Abstract:
“Historical accounts of financial crises suggest that fear and greed are the common denominators of these disruptive events: periods of unchecked greed eventually lead to excessive leverage and unsustainable asset-price levels, and the inevitable collapse results in unbridled fear, which must subside before any recovery is possible. The cognitive neurosciences may provide some new insights into this boom/bust pattern through a deeper understanding of the dynamics of emotion and human behavior.
In this chapter, I describe some recent research from the neurosciences literature on fear and reward learning, mirror neurons, theory of mind, and the link between emotion and rational behavior. By exploring the neuroscientific basis of cognition and behavior, we may be able to identify more fundamental drivers of financial crises, and improve our models and methods for dealing with them.”
To read full Andrew W. Lo’s research paper click Fear, Greed, and Financial Crises: A Cognitive Neurosciences Perspective (pdf) pages: 50, MIT Sloan School of Management; MIT CSAIL; National Bureau of Economic Research (NBER), Oct 13, 2011.
