ABSTRACT
This chapter introduces first published in early 2008, marked a formal attempt to set out for peer review by the psychoanalytic community a theory of financial instability. The central idea is that the financial bubble trajectories to which financial markets are subject exhibit a path-dependent sequence of self-reinforcing unconscious phantasy narratives and emotional states. Self-reinforcing feedback and feed-forward processes occur at emotional, cognitive, and technical levels. Phantastic objects stimulate what Bion described as a paranoid-schizoid state of mind, a process further enabled by basic assumption group processes. The economics literature on uncertainty discusses only uncertainty aversion. The power of phantastic object narratives is that they offer relationships to subjectively very attractive idealised "objects". Narratives are used by human actors to organise large quantities of data and create conviction about its interpretation—they combine cognitive and affective elements. The dilemmas thrown up by the nature of financial assets just described create a problem for determining incentives and judging performance.
