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Appears in Collections:Economics Journal Articles
Peer Review Status: Refereed
Title: Cognition, market sentiment and financial instability
Author(s): Dow, Sheila
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Keywords: financial instability
Financial crises
Investments Psychological aspects
Issue Date: Mar-2011
Date Deposited: 7-Jun-2011
Citation: Dow S (2011) Cognition, market sentiment and financial instability. Cambridge Journal of Economics, 35 (2), pp. 233-249.;
Abstract: The purpose of this paper is to explore the role for psychology within a structural theory of financial instability, and to consider the implications for policy. While behavioural finance has drawn on ideas from psychology in order to explain evidence of behaviour which deviates from the rationality axioms, it is argued that the way in which psychology is framed by this approach is unduly limiting. Minsky’s structural theory of financial instability, with its Keynesian roots, allows for a different way of incorporating psychology into the theoretical foundations, allowing it more scope. In particular, cognition and sentiment are shown to be interconnected rather than separable. It is concluded that the policy implications for addressing the current crisis, while apparently similar between these different approaches, are in fact very different. The underlying theory involves different methodology, and indeed different framing, from behavioural finance. The way in which the crisis is understood is therefore important for policy.
DOI Link: 10.1093/cje/beq029
Rights: Published in Cambridge Journal of Economics by Oxford University Press / Cambridge Political Economy Society.; This is a pre-copy-editing, author-produced PDF of an article accepted for publication in Cambridge Journal of Economics following peer review. The definitive publisher-authenticated version, Cambridge Journal of Economics, Volume 35, Issue 2, March 2011, pp. 233 - 249 is available online at:

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