Coffman, DD; (2020) The Trouble with Minding Markets: Emotional Finance in Context. In: Ahangar, RG, (ed.) Investment, Asset Pricing and Portfolio Choice Strategies. IntechOpen: London, UK.

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Abstract

The term ‘Emotional Finance’ normally denotes a methodological approach advocated by Richard Taffler and David Tuckett, which they intended as a challenge both to Behavioral Finance and to mainstream finance and economics. In the wake of the Great Financial Crisis, Emotional Finance received a warm reception from regulators, the financial press, and the CFA Institute. Nearly a decade on, their ideas have largely failed to achieve traction in the academic literature, and continue to struggle to find empirical validation. Their approach is essentially an application of Kleinian psychoanalysis to financial markets, albeit without the terminological rigor that psychoanalytic practitioners might expect. Because their approach is inherently interdisciplinary, it has rarely been subject to scrutiny, as few psychoanalytic commentators feel qualified to comment on financial markets, and fewer finance academics feel comfortable commenting on the psychoanalytic theory. This chapter characterizes the main theoretical claims of Emotional Finance, and subjects each of them to scrutiny, finding them largely untenable. Although financial bubbles are commonplace and emotional responses to markets unremarkable, the subsidiary arguments advanced by advocates of Emotional Finance to support their primary claims are found wanting. The interpretative strategy of Emotional Finance is fundamentally flawed. Although it is fruitful to analyze the role of emotions in financial markets, more precise, rigorous and realistic approaches to these problems are needed.

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