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Handbook on Systemic Risk by Joseph A. Langsam, Jean-Pierre Fouque

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23

Fear, Greed, and Financial Crises: A Cognitive Neurosciences Perspective

Andrew W. Lo

Abstract Historical accounts of financial crises suggest that fear and greed are the common denominators of these disruptive events: periods of unchecked greed eventually lead to excessive leverage and unsustainable asset-price levels, and the inevitable collapse results in unbridled fear, which must subside before any recovery is possible. The cognitive neurosciences may provide some new insights into this boom/bust pattern through a deeper understanding of the dynamics of emotion and human behavior. In this chapter, I describe some recent research from the neurosciences literature on fear and reward learning, mirror neurons, theory of mind, and the link ...

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