Discussion Paper

No. 2009-37 | July 29, 2009
Addressing the Psychology of Financial Markets


The author suggests the 2008 financial crisis was the culmination of an accelerating process of financial market evolution that is inherently unstable. From his viewpoint markets are not well organized to manage the power financial assets have to generate emotion and their wider effect on human imagination and judgement, anchored in neurobiology. Judgements and so decisions about risk, reward and the evaluation of success can become systematically compromised because the excitement of potential gain is disconnected from the anxiety of potential consequences; producing groupthink and bubbles. When anxiety breaks through a catastrophic loss of confidence is inevitable. In the aftermath the emotional pain of accepting responsibility prevents lessons being learned.
The author´s theoretical framework is influenced by modern psychoanalysis drawing on an interview study of international fund managers in 2007. He suggests underlying psychological conflicts have influenced the way market institutions have evolved to compete by selling the promise of exceptional performance. To cope with the expectations upon them, agents are impelled to base their actions on stories which overvalue opportunities and underestimate risks; creating agency issues and facilitating the very process of disconnecting anxiety from excitement which creates bubble potential. Policy implications go well beyond improving regulation and transparency.

JEL Classification:

G18, G28



Cite As

David Tuckett (2009). Addressing the Psychology of Financial Markets. Economics Discussion Papers, No 2009-37, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2009-37

Comments and Questions

Anonymous - Referee Report 1
August 11, 2009 - 09:01

See attached file

Anonymous - Please improve references
August 11, 2009 - 11:11

This looks intriguing.

I would appreciate having page numbers in all references, and all available Internet addresses for references.

For instance: I found the Tuckett-Taffler article on which this one is based at


online. You can spare such searches for the reader.

Anonymous - Referee Report 2
August 12, 2009 - 08:45

See attached file

Anonymous - Some questions
August 12, 2009 - 09:47

It is nice to consider psychology--but there are other psychological strains of thought not discussed. It would be nice to obtain at least a hint as to why the psychoanalytic approach is to be preferred, or is psychoanalysis just another "phantastic object"? (I apologize for the pun, but the argument ...[more]

... in the paper was suggestive.)

What does the paper say more than that investors follow conventional judgments, and this leads to bubbles?

As to policy implications, I find the recommendation for greater awareness of the differences between financial markets and other markets rather feeble. What about taxing financial transactions, as Keynes suggested. How to judge concrete measures like that from a psychoanalytical point of view?

David Tuckett - Reply to Referee Reports 1 + 2
August 20, 2009 - 11:19

See attached file

Anonymous - Invited Reader Comment
September 28, 2009 - 11:28

See attached file