An Emotional Finance Approach to Investors & Consumers Decision-Making Across the Product & Financial Market

Abstract

The Emotional Finance framework represents the latest evolutionary development of the traditional finance paradigm. Preceded in development by the Behavioural Finance Framework, the Emotional Finance framework introduces unconscious emotions in a Freudian psychoanalytical framework into the financial markets for the first time, proposing emotional oscillation as a cause for asset pricing inefficiencies. The framework incorporates potent emotional experiences of investor love (paranoid schizoid) and hate (depressive) in the deviation of asset prices relative to underlying fundamental value within traditional equity markets. However, Dow (2010) argues that the Emotional Finance framework is merely conceptual in nature and, due to the subjective nature of crisis events that influence financial markets, is only fit as a retrospective framework, ex-post. In this thesis we address Dow’s critique of the Emotional Finance framework, striving to bring forth a prospective and applicable contribution to the Emotional Finance space.
This thesis presents an original contribution to knowledge by proposing a formal, novel model of the Emotional Finance framework, demonstrating investor love (bubble) and hate (crash) within the Crypto market environment, setting a foundation for future research into emotionally led market environment pricing inefficiencies. Further, we adapt our novel, formal Emotional Finance model’s focus onto the Cryptocurrency market environment, producing a new conceptual approach that introduces institutional fundamental value, coupled with technical analysis of Bitcoin price action. Next, we strengthen our contribution by creating a novel Hotelling model that introduces persuasive advertising into the financial market domain for the first time through a product market spill-over effect. We demonstrate the influence of persuasive advertising on investor trading decision-making, leading to asset pricing inefficiencies relative to fundamental value. We then contribute to knowledge by adapting the blended qualitative and quantitative work of Fairchild et al. (2016) to focus on Cryptocurrency environments, conducting an experimental pilot study that strives to explore the relationship between self-reported emotional potency and risk preference, with trading game performance. Our results show that there is no statistical significance between self-reported investor emotional state and risk preference (attitude to risk) and participant performance within a 29-trial trading game challenge at time = T.
Furthermore, we synthesise our observations and findings to direct opportunities for future research, focusing on the impact of differing financial market environments and fundamental factor availability in the investor trading decision-making process. Finally, we discuss the implications of our formal Emotional Finance model on the direction of future research, blending existing literature with the prospect of future, novel research.

Date of Award	7 May 2025
Original language	English
Awarding Institution	University of Bath
Supervisor	Richard Fairchild (Supervisor), Weixi Liu (Supervisor) & Emmanouil Platanakis (Supervisor)