Phantastic objects and the financial market’s sense of reality: A psychoanalytic contribution to the understanding of stock market instability

Abstract

This paper sets out to explore if standard psychoanalytic thinking based on clinical experience can illuminate instability in financial markets and its widespread human consequences. Buying, holding or selling financial assets in conditions of inherent uncertainty and ambiguity, it is argued, necessarily implies an ambivalent emotional and phantasy relationship to them. Based on the evidence of historical accounts, supplemented by some interviewing, the authors suggest a psychoanalytic approach focusing on unconscious phantasy relationships, states of mind, and unconscious group functioning can explain some outstanding questions about financial bubbles which cannot be explained with mainstream economic theories. The authors also suggest some institutional features of financial markets which may ordinarily increase or decrease the likelihood that financial decisions result from splitting off those thoughts which give rise to painful emotions. Splitting would increase the future risk of financial instability and in this respect the theory with which economic agents in such markets approach their work is important. An interdisciplinary theory recognizing and making possible the integration of emotional experience may be more useful to economic agents than the present mainstream theories which contrast rational and irrational decision-making and model them as making consistent decisions on the basis of reasoning alone.

Herding behaviour and market dynamic volatility: evidence from the US stock markets

“…Surprisingly, investors seem not to exhibit herding behaviour during the recession period (third sub-period December 2007-June 2009) with γ 2 and γ 3 parameters are negative and insignificant. The absence of herding during the recession period (the after crisis period) can be explained by the emotional financial theory of Tuckett and Taffler (2008). The authors claim that as a consequence of the crisis investors are hit by reality and exhibit a combination of conscious emotions of anger, regret and blame sentiment.…”

‘Fantasy of Fusion’ as a Response to Trauma: European Leaders and the Origins of the Eurozone Crisis

“…The Maastricht Treaty may thus be seen as an example of what Fotaki (2010) describes as public policies that are the product of fantasy, while the euro can be seen as what psychoanalytically inspired finance scholars Tuckett and Taffler (2008) have referred to as a 'phantastic object' invested with 'latent (unconscious) wishes ' (2008, p. 395). Put differently, the single currency was an attempt to exorcise a history stained with centuries of conflict and spilt blood, and prevent its repetition by creating a highly problematic single currency union, in defiance of clear and stark warnings about its viability.…”

Emotions in the Financial Markets

“…In their seminal and groundbreaking work, Taffler and Tuckett (2005), Tuckett and Taffler (2008), and Eshraghi and Taffler (2009) institute a major paradigm shift by introducing a new field of research, namely emotional finance. This develops the research in behavioral finance by analyzing the effect of unconscious, infantile emotions on investors' decisions.…”

“…For example, Tuckett and Taffler (2008) apply the framework to the Internet dot-com bubble, which occurred between 1995 and 2000. In the 18 months between October 1, 1998 and March 9, 2000, the Dow Jones Internet Index multiplied six times.…”