The Unconscious Process Behind Financial Instability

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Sep 01, 2020


This article is part of a series on cutting edge research that has the potential to create positive social impact. While the research is inherently specific, we believe that the insights gleaned from each piece in this series are relevant to behavioral science practitioners in many different fields. At TDL, we are always looking for ways to translate science into impact. If you would like to chat with us about a potential collaboration, feel free to contact us.


It seems as though we live in a world of boundless financial speculation, from volatile stock markets to unpredictable crashes that damage our faith in assured progress and safety. Professor Selim Aren is a researcher in business administration who believes that unconscious drivers may be responsible for the madness that plays out in today’s financial markets. He has pioneered a niche area of study at the crossroads of experimental psychology and finance to determine some of the causes of this complex part of our lives. 

The Decision Lab is a social enterprise that aims to democratize behavioral science. We aspire to share this essential insight with a wide audience, with the hope of reaching the ears of critical decision-makers. With this goal in mind, we reached out to Selim to connect his important work with a broader audience. Too often, research does not naturally reach the people that need its luminance the most. This piece is part of a series that aims to bridge that gap.

Nathan: How would you describe the focus of your research in simple terms?

Selim: Throughout history, many financial bubbles have been observed, such as the tulip balloon and the South Sea Company. Although people think that these will not be repeated in modern times, the dot com and hedge fund financial bubbles of the early 2000s refute this. In our research, we investigate why people do not learn from these events. Our main idea was that unconscious processes can have an impact on people’s decisions. Therefore, “phantasy” based on human infancy was the focus of our study.

Nathan: What does phantasy mean?

Selim: Phantasy is different from fantasy. Fantasy is conscious. However, phantasy refers to unconscious dreams. Sometimes we develop our own phantasy without realizing it ourselves. Sometimes others develop our phantasy for us. Many people want to get rich quickly. They believe in the existence of financial investments with no risk but with very high returns. This belief exists not only in individual investors but also in financial professionals. They also believe, perhaps unconsciously, in such a dream. This belief often develops through narratives of genius investors that seemingly can do no wrong. We tried to understand and explain the factors that develop these unconscious dreams of success without risk.

Nathan: What did you expect to be behind this phenomenon?

Selim: The main purpose of this research was to find phantasy determinants. Just because phantasy is an unconscious process does not mean it cannot be manipulated. If people’s phantasy leads them to poor financial decisions, we can protect people from this mistake by manipulating phantasy. If phantasy was unconscious, there is likely another unconscious process driving it. With this in mind, we began with a literature review. The prominent concepts were states of mind, group feeling, and narratives. However, there were no empirical studies showing the relationship between these concepts and phantasy. This excited us very much. There were theoretical relationships, but they had not been empirically modeled and tested. We also knew that herd behavior is typical of financial bubble periods. At that time we thought that this too could be effective in phantasy development. This is how we designed our model, developed scale our variables, and tested them.

Nathan: How did you test your model?

Selim: The first thing we did was to read and understand the literature very well, because phantasy has been the subject of very limited study in the field of finance. However, this was not very different in the general literature. Studies were theoretical or interview-based, which was not suitable for generalizations. If we could develop a scale, we thought that a large number of people could be surveyed. For this, we developed scales for both phantasy and phantasy determinants. Because there was no scale for them either in the financial literature or in the general literature. Also, since our focus is on financial bubbles and human madness, we based our scale on financial concepts. Then we had to model the relationship of phantasy determinants to each other and to phantasy. This was also a difficult and first-time process. Ultimately, we achieved this and tested our model.

Nathan: What did you end up finding out?

Selim: This research exposed some phantasy determinants and their relationship to each other. We found that narratives, and divided mind and group feelings are strongly related to each other. The typical behavior of the financial bubble periods was herd behavior. However, this did not have a unique structure. There could be informed and uninformed herd behavior. It was the informed herd behavior that increased phantasy. There is even a moderation effect in the relationship between informed herd behavior, narrative and group feeling to phantasy. This shows us the strong impact of using similar sources of information and performing similar analyzes. It also serves as a guide for manipulating phantasy. Formation of financial bubbles can be controlled if sources of information are correctly directed by public authorities.

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Nathan: How do you think this is relevant to an applied setting?

Selim: It is very important that the phantasy effect, which we consider as the determinant of financial bubbles, is also accepted by public authorities. In this way, they will know not only how to manage conscious processes but also to take actions to manage unconscious processes. Also, having knowledge about the determinants of this unconscious process is very useful for their understanding of the process. Because our knowledge up to now has been aimed at providing conscious explanations of human madness, which causes policy to be implemented only against  conscious processes. Thanks to the findings of this research, the awareness of unconscious processes can also be developed and policies related to this can be developed.

Nathan: What do you think some exciting directions are for research stemming from your study? 

Selim: We are excited to have created awareness of the impact of unconscious processes and phantasy on financial decisions. It is also pleasing that we have developed the first financial scales for these concepts. We believe that the findings of this study will be a guide for future studies. As the empirical studies that follow this research increase, different relationships can be found and generalizations can be made.

About the Authors

Selim Aren

Selim Aren

Yildiz Technical University

Selim Aren is a full professor at Yildiz Technical University in Istanbul, Turkey. He works in the faculty of Business Administration, in the department of Economics. He specializes in the study of behavioral and emotional finance, as well as business development and project management strategies. He has previously held positions at Gebze University and Marmara University, in business administration and insurance.

Nathan Collett portrait

Nathan Collett

Senior Editor

Nathan Collett studies decision-making and philosophy at McGill University. Experiences that inform his interdisciplinary mindset include a fellowship in the Research Group on Constitutional Studies, research at the Montreal Neurological Institute, a Harvard University architecture program, a fascination with modern physics, and several years as a technical director, program coordinator, and counselor at a youth-run summer camp on Gabriola Island. An upcoming academic project will focus on the political and philosophical consequences of emerging findings in behavioral science. He grew up in British Columbia, spending roughly equal time reading and exploring the outdoors, which ensured a lasting appreciation for nature. He prioritizes creativity, inclusion, sustainability, and integrity in all of his work.

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