Psychology and economics relationship to finance

psychology and economics relationship to finance

Is there any relation between subjects like psychology and economics? Jeff Miller, 45+ years in finance, economics, financial planning, Commodities Trading, . “Psychology is evidently at the basis of political economy and, in general, of all fields of economic inquiry (finance, development economics, game theory, etc.) of the complex history of the relationships between economics and psychology. the relationship between economics and psychology, focusing also to Baddeley, M. (), Behavioural Economics and Finance, London.

Emotion and story-telling create a context for financial market instability because stories about fundamentals are always much more straightforward than the underlying economic fundamentals they describe.

  • The Economics and Psychology of Building Sustainable Finance
  • The Relationship Between Psychology and Economics

And changes in stories are more susceptible to such emotions as doubt and excitement. In such situations, many financial market participants unconsciously undergo a decoupling of excitement and anxiety in the face of innovations.

Such stories and associated states of mind create myopic relationships with information and how to process it realistically.

Psychology and economics in historical perspective

Confidence in an uncertain context is always very close to overconfidence. This leads to stories about potentially immense yields at no perceived risk—and hence to excessive risk-taking.

psychology and economics relationship to finance

Furthermore, this behavior and the emotional and psychological states in which it is founded imply temporal myopia, heavily weighting short-term gains over long-term losses. Building stable and sustainable finance requires a combination of psychological factors, regulatory constraints and well-balanced economic incentives.

psychology and economics relationship to finance

A previous GES session suggested the value of gathering information on psychological biases in financial markets, developing indices of psychological excitement and using this information in the design of monetary policy and financial regulation. According to that GES session, temporal myopia can be reduced by linking executive remuneration to long-term performance rather than short-term financial success and by taxing short-term profit-taking higher than long-term profit-taking.

The Relationship between Psychology and Economics: Insights from the History of Economic Thought

To formulate appropriate policy instruments, it is vital to assess the kinds of stories circulating in markets, to measure accurately how far they contain over-excitement and to think about how to use this information to install a warning device for future bubbles.

Planned publication of the issue: Basics of behavioral economics are now part of any curricula in economics. The advent of behavioral economics has often been associated with a story-telling argument about its early development in the s and its establishment, focusing on three main points: In recent years, historians of economic thought, philosophers and theoreticians have shown an interest in understanding the ins and outs of the behavioral turn in economics, and more broadly, on the introduction of psychological elements in economic explanations.

Some have focused on recent history, enhancing the different trends of behavioral economics. Others have dealt with the nascent of behavioral economics and the early collaboration between economists and psychologists in the s. Still some others have tried to understand how the marginalist school of thought had relied on the experimental psychology of its time—namely psychophysics—and how it had progressively been expelled out of the realm of economics, at least temporarily, with Pareto and Fisher.

However, those contributions have not been coordinated and we are far from having a comprehensive overview of the complex history of the relationships between economics and psychology.

The Economics and Psychology of Building Sustainable Finance — Global Economic Symposium

The overall ambition is to understand the way economics has dealt with psychological arguments, methods and concepts throughout history and to highlight the main debates between economists and psychologists that have fostered and are still fostering behavioral economics.

It is hoped that these will pave the way for an overall vision of the history of the relationships between economics and psychology and of the methodological transformations of economics as a discipline. The deadline for submitting is July 30th,