ABSTRACT
People make rational investment decisions because money is involved, or at least that is one of the pillars of traditional finance. However, research shows that the opposite is true—people make irrational investment decisions because money is involved. This chapter focuses on the impact of emotional responses and mood on financial behavior. Psychologists Paul Ekman and Wallace V. Friesen argue that we have six basic emotions: happiness, anger, sadness, fear, surprise, and disgust. They state that all other emotions are just amalgamations of these six basic emotions, in the same way that all colors are simply a mix of three primary colors (red, yellow, and blue). While emotions are often thought of as a cognitive reaction, they are also associated with a physical response. Indeed, emotions fall into a category of psychophysiology that combines the study of psychology and biology.
