ABSTRACT
The everyday use of volatility suggests that it has two meanings. The first is associated with quantitative changes in weather or stock prices, and the second is with the modulations of affect and emotions; the question is whether these two dimensions of volatility have anything in common. This chapter examines this question through an examination of how finance has treated the quantitative dimension of volatility through its reliance on a model of subjectivity taken from expected utility theory and the philosophy of action; this “belief-desire” model, which is the dominant one in the social sciences and especially in economics, finance, and political science, marginalizes affect and emotions as irrational influences. However, recent work in behavioral economics such as Daniel Kahneman’s Thinking, Fast and Slow suggests a more constructive role for affect, pointing to Csikszentmihalyi’s work on flow as an alternative. This chapter suggests that trading (traders self-describe themselves as “surfing the volatility wave”) is a combination of a more quantitative model of decision-making under uncertainty and a flow model of affect, which requires a rethinking of the role of time in financial models.
