Emotions and Financial Decision Making

Abstract

In this chapter, we discuss how theorizing about the role of emotions in financial decision making has changed over the years and review results that indicate the impact of feelings on different stages of the decision process. We show that views on how emotions influence and modify financial decision making have switched from a notion that they are only a side product of choice to concepts positing that feelings may be pivotal and causal factors that serve as an informative cue in the decision-making process. We highlight a distinction between integral (i.e., directly related to a decision problem) and incidental (i.e., irrelevant to a decision problem) emotions and the regulatory role that these two categories play in financial choices. We also focus on specific integral emotions that are elicited by mental imagery and provide empirical evidence from our own research that demonstrate how the interplay between emotions and mental imagery provides inputs to decisions in uncertain circumstances. We also review research on the effects of mood on financial decision making. Finally, we discuss how integral and incidental emotions may guide financial decision making and how we can use this knowledge to improve the decision-making process.