The recognition that emotions such as fear can drive investment choices is a relatively new one. Classical economics long viewed people as hyper-rational. But in the 1960s, a new field called behavioural economics emerged to show that’s far from the case, reported Macleans.ca Dec. 1:

Julie Tyios was already a savvy investor by her mid-20s, when the Great Recession hit. “I had played the markets before, and watched my parents live off their stock portfolios,” she says. But the small-business owner wasn’t prepared for seeing half of her portfolio wiped out in 2008, an experience that was, to say the least, “very upsetting.” Since then, Tyios has avoided the stock market altogether. The fear of losing so much again overshadows the possible joy she may glean from a gain. “As much as I would love to invest, the recession did a lot of damage to the market.” And, more than that, it did a lot of damage to the psychology of today’s investors.

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Peter Darke, a professor of marketing at York’s Schulich School of Business, has been looking at the effects of fraud on investment behaviour, and he’s found that fraud by one firm induces an irrational suspicion among investors that causes them to lower their investments in other, unrelated firms. In other words, fear spreads fast and can spoil otherwise safe investments in people’s minds. This negative bias even applies to very well-known and otherwise trusted institutions, like Canadian banks. “While rationally you recognize you can trust the Royal Bank, motivationally you’re not willing to take a chance,” he says. “People become irrationally suspicious.”

Financial fears can also affect more than just stock choices. At York University, Esther Greenglass, a psychology professor in the Faculty of Health, has been conducting an international study that looks at the emotional and psychological effects of the economic downturn. So far, she’s found that people’s personalities (their fears and anxieties) impact things like their financial health and even their ability to find a job. “We are finding that debt, employability and financial well-being are all related,” she says. “If a [person] believes they are not going to get a job in the future, their financial well-being is lower.” Feelings of financial doom are also correlated to higher rates of anxiety and depression.

These findings reinforce the view of behavioural economists that “the way people approach the economy is not rational. Emotional factors influence how we react to the economic situation and to our own finances,” Greenglass says.

Republished courtesy of YFile– York University’s daily e-bulletin