Affect and Financial Decision-Making: How Neuroscience Can Inform Market Participants

We review recent neuroscience literature on the influences of moods, attitudes, and emotions (affects) on financial decision-making. Evidence indicates the existence of separate brain systems, linked to affect processing, that are responsible for risk-taking and risk-avoiding behaviors in financial settings. Excessive activation or suppression of either system can lead to errors in investment choices and trading behaviors. We suggest ways for market participants to become aware of the potential impact of affect on their behavior in order to avoid suboptimal financial decisions. This paper has two overall aims: to educate financial practitioners about the origins of emotions that can adversely impact their performance, and to teach investors how to make better financial decisions.