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Minding the Markets

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Minding the Markets

An Emotional Finance View of Financial Instability

Palgrave Macmillan,

15 min read
10 take-aways
Audio & text

What's inside?

Current economic theory creates a crisis cycle by failing to consider human nature.

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Editorial Rating

6

Qualities

  • Applicable

Recommendation

Psychoanalysis professor and economist David Tuckett advances brave theories about the dangerous way financial theory fails to consider human emotion and behavior. He explains that if market analysts continue to ignore this missing link, they will invite a repeat of the 2008 financial crisis. Tuckett seems genuinely mystified that financial theory has yet to account for how humans really make decisions. At times, the book suffers from the lack of an attentive editor. The author occasionally gets rolling on a deep point and wanders off into an academic swamp. Overlook these minor rough spots and you’ll learn a lot. This analysis is critical to understanding mob mentality in investing, even if Tuckett’s explanations aren’t always so smooth. Praise to him anyhow for his inspection of the holes in current financial theory and for his forensic analysis of the 2008 crisis. He presents viable ideas about how economic theory must change. getAbstract recommends his work to financial professionals with a solid grasp of economic theory, to market investors and to psych students with an interest in finance. All readers need a measure of patience, since the book is a deep dive into the finer points of economics and psychology.

Summary

The Missing Ingredient

Since the financial crisis of 2008, experts have been pointing fingers as they try to identify what went wrong. While modern financial theories shed light on the problems, they fail to account for human emotion and its effect on financial decisions. Current economic theories are based on two assumptions: First, people are rational when they make decisions and set expectations, and, second, both buyers and sellers in a transaction are equally informed. Market efficiency relies on an orderly world full of orderly people making reasonable decisions. This theory is far too simple. The world is not orderly. People are not always rational or equally informed. The world is chaotic and unpredictable. Emotions influence every human decision. Even seasoned financial managers and well-educated investors are fallible. The emotional impact is even more evident when critical, pressing situations require decision making without in-depth research. In that scenario, individuals make choices based on gut instinct or arbitrary rules that are likely far too simple for the situation.

Trust and Confidence

Two pivotal emotions, trust and confidence, lie at ...

About the Author

David Tuckett, a fellow of the Institute of Psychoanalysis in London, is an economist, a prolific author and a professor at University College London.

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