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Faculty of Economics

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Baddeley, M. C.

Neurofinance and financial instability

Analyse Financiere

Vol. 43 pp. 48-51 (2012)

Abstract: Speculative episodes are an enduring feature of financial markets. From Tulipmania through to the South Sea Bubble, bubbles and today's global financial crises – speculative episodes are endemic. Standard financial models assuming mathematical decision-making within efficient financial markets are difficult to reconcile with speculative episodes because financial decisions are affected by emotions. Emotions generate speculation and financial volatility if they push asset prices away from longterm fundamental values but they are not easy to quantify. Neurofinancial analysis has the power to fill the gap by providing objective neuroscientific data capturing interactions between cognition and emotion in financial decision-making.

JEL Codes: G11

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