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.