Greed and fear
Greed and fear are supposed, together with herd instinct, to be the three main emotional motivators of stock markets and business behavior, and one of the cause of bull markets, bear markets and business cycles.
From a market saying to an academic research topic
The phrase, traditionally used by traders and market commentators, has become a topic of economic research about investor irrationalities (cognitive and emotional biases). Its effects on market prices and returns contradict, or at least moderate, the efficient market hypothesis.
Here are two examples of approaches:
- How those two alternating emotions work for traders, and how they can distort their decision process, has been the subject of neuroeconomics studies (1). More generally, those researches show some primacy of emotion over cognition in decision making.
- According to Hersh Shefrin, one of the key researchers in Behavioral economics, the phrase hope and fear, although less colloquially used, would describe better those alterning excessive expectations by market players (2)
Tools to measure greed and fear
There is an app called Ayaxia that is being developed to measure and analyze traders' emotions through biofeedback. The app helps users reach their peak performance during certain activities. Ayaxia acquires users biofeedback and process this data with their skills, goals, and anxiety/boredom level. The app is based on a previous research done by the National Bureau of Economic Research, Fear and Greed in Financial Markets (view References below) and the study of Flow (psychology) by Mihály Csíkszentmihályi. The app will interface with a wrist-worn watch by Oxitone, a medical-grade pulse oximeter which eliminates the need for an ‘crocodile clip’ fingertip sensor and thereby continuously measuring oxygen saturation (SpO2), heart rate and respiratory rate wirelessly and entirely at the wrist.
- Fear and Greed in Financial Markets: A clinical study of Day-traders
- Shefrin, Hersh (2002) Beyond Greed and Fear: Understanding behavioral finance and the psychology of investing. Oxford University Press
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