Emotionally Involved Investors — Is There Any Finance Theory Fitting to Ethical, Crowdfunding and Fan Bond Investors?

Ralf Trost and Alexander Fox

Chapter 3 in Modern Finance and Risk Management:Festschrift in Honour of Hermann Locarek-Junge, 2022, pp 27-53 from World Scientific Publishing Co. Pte. Ltd.

Abstract: It is quite obvious that emotions influence human decision-making. Conventional finance theory as well as conventional decision theory assume strictly rational behaviour. Behavioural finance, on the contrary, assumes bounded rationality causing humans to make mistakes. In this chapter we argue that both perspectives do not adequately cover decisions influenced by emotions and depict three very different kinds of emotional involvement in making investment decisions, one of them illustrated by empirical data. At the end, it shows it is fruitless to try to incorporate such phenomena in formal theories as well as declaim this impossibility once more and complain about normative theories not being descriptive.

Keywords: Finance; Risk Management; Commodities; Energy Finance; Risk; Cryptocurrencies; Asset Management; Banking; Behavioral Finance; Behavioural Finance; Markowitz; Portfolio Selection; Asset Allocation; Crowdfunding; COVID; Pandemic; Corona; Investment Strategies; Low-Risk Investments; Social Banks; Excess Liquidity; Cost of Capital; Utilities; Network Industries; Private Equity; Small and Medium-Sized Enterprises; Black Swan; Statistical Inference; Maximum Likelihood; Bayesian Methods; Tail Risks; Conditional Value-at-Risk; Tail Nonlinearly Transformed Risk; Capital Constraints; Bank Regulation; Subjective Risk Assessment; Expert Knowledge; Model Risk; Risk Factors; Option Pricing; Volatility; Resilience; Supply Chains; Disruption; Systemic Risk; Oil; Renewable Energies; Corporate Risk Management; Power Purchase Agreements; Gold; Precious Metals; Dynamic Correlation; Mixed Data Sampling (search for similar items in EconPapers)
JEL-codes: G11 G3 G32 G4 (search for similar items in EconPapers)
Date: 2022
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