Journal of Financial and Quantitative Analysis

Research Articles

The Influence of Affect on Beliefs, Preferences, and Financial Decisions

Camelia M. Kuhnena1 and Brian Knutsona2

a1 Kellogg School of Management, Northwestern University, 2001 Sheridan Rd., Evanston, IL 60208.

a2 Department of Psychology, Stanford University, 470 Jordan Hall, Stanford, CA 94305.


Neuroeconomics research shows that brain areas that generate emotional states also process information about risk, rewards, and punishments, suggesting that emotions influence financial decisions in a predictable and parsimonious way. We find that positive emotional states such as excitement induce people to take risks and to be confident in their ability to evaluate investment options, while negative emotions such as anxiety have the opposite effects. Beliefs are updated so as to maintain a positive emotional state by ignoring information that contradicts individuals’ prior choices. Marketplace features or outcomes of past choices may change emotions and thus influence future financial decisions.

(Online publication February 18 2011)


We are grateful to Colin Camerer, Michael Jensen (the referee), Paul Malatesta (the editor), Paola Sapienza, and Devin Shanthikumar; to participants at the Fall 2007 National Bureau of Economic Research Corporate Finance meeting, the 2007 European Summer Symposium in Financial Markets in Gerzensee (Switzerland), the 2008 Western Finance Association, and the 2009 Royal Economic Society meeting; and to seminar participants at Stanford University, the University of California at Berkeley, and Northwestern University. We thank the Zell Center for Risk Research at the Kellogg School of Management for providing generous funding for this project. All remaining errors are ours.