Motivation and emotion/Book/2022/Financial investing, motivation, and emotion

Financial investing, motivation, and emotion
What role does motivation and emotion play in financial investing?


Figure 1. Investors are often motivated by seeking financial gain and increasing wealth

Financial investing involves allocating resources, such as money, toward something such as an asset or a project with the hope of increasing one’s wealth over time (Picardo, 2022). There are many possible investment assets, such as real estate or shares. However, regardless of which asset one invests in, behaviour is considered to be a large part of it (Baker & Ricciardi, 2015), including, but not limited to motivation and emotion. It is even more important now than ever before to understand behavioural finance concepts considering that there has been a recent shift by individuals, especially millennials, towards understanding investments (Goforth, 2021).

Motivation is an individual's drive to initiate and maintain behaviours. People vary in how motivated they are, as well as why they are motivated, and theories surrounding motivation (Deci & Ryan, 2000) seek to explain why this is. In relation to financial investing, people are primarily driven by extrinsic motivation, that is to act in such a way to achieve a desired outcome, or intrinsic motivation, which is behaviour driven by the inherent satisfaction of performing the behaviour. Understanding investors' motivation contributes significantly to an overall understanding of investing behaviour.

Emotions are automatic responses to events, and are thought to be pre-programmed but also influenced by life experiences (Ekman & Cordaro, 2011). There are seven basic universal emotions, with those being anger, fear, surprise, sadness, disgust, contempt, happiness. It has been said that “Individuals who cannot master their emotions are ill-suited to profit from the investment process.” (Graham as cited in Baker & Ricciardi (2015)), suggesting that the field involving emotions is highly relevant to financial investing. Some notable concepts include regret, risk taking, and the ending effect. These theories of emotions are very influential to investing.

Whilst both motivation and emotion significantly influence financial investing behaviour, developing a greater understanding of these fields can assist investors, and those surrounding them. Understanding the impact of motivation and emotion is one thing, however being able to harness this understanding to improve financial investing is another likely greater thing altogether. These concepts exemplify how psychological sciences can be simplified, understood, and made use of to complement other academic disciplines, as well as improve the lives of everyday people.

Focus questions:

  • How does motivation impact financial investing?
  • How do emotions impact financial investing?
  • How can individual investing be improved by considering theories of motivation and emotion?

What is financial investing?Edit

Financial investing is the act of purchasing assets with the hope that the assets will increase in value over time and/or provide returns (See figure 1.), thereby increasing the investor’s wealth (Napoletano & Curry, 2022).  Some examples of commonly held assets include shares, real estate, bonds, commodities, mutual funds, exchange traded funds, and more (Napoletano & Curry, 2022). Typically, a financial investor will develop a strategy to suit their current life and their future intentions.

  Case study:

Jamie would like to start financial investing, but does not have any experience yet. Follow along in the case study as Jamie learns how motivation and emotion may affect their investing.

Motivations influencing financial investingEdit

In their paper, Deci and Ryan (2000) state that “to be motivated means to be moved to do something.” (Deci & Ryan, 2000), and as such, a motivated person is one that is energized or activated toward an end. People vary in their level and their orientation of motivation, meaning they vary in how motivated they are, as well as why they are motivated. Deci and Ryan (2000) suggest that motivation lies on a continuum that is dependent on the degree of internalisation and integration that an individual adopts. This continuum consists of amotivation, extrinsic motivation (including its forms: External regulation, introjection, identification, and integration), and intrinsic motivation.

To explore the influence of motivation on financial investing, extrinsic and intrinsic motivation will be examined.

Extrinsic motivationEdit

Figure 2. Motivation is said to lie on a continuum.

Extrinsic motivation drives the individual to do something for the outcome it may deliver. Deci and Ryan (2000) suggest that there are four types of extrinsic motivation (See figure 2.): External regulation, introjection, identification, and integration. Behaviours motivated by external regulation are motivated purely to satisfy an external demand, gain a reward, or avoid a consequence. With slightly more of an internal origin, behaviours motivated by introjected regulation are driven by the desire to regulate self-esteem, whether by avoiding anxiety or attaining positive emotions. More internal again is identification, in which an individual accepts the regulation of their behaviour due to identifying the personal importance of said behaviour. Finally, integrated regulation is the most autonomous and unconflicted of the extrinsic motivations, and in this regard, it is similar to intrinsic motivation, however the behaviour is still performed to attain an outcome distinct from the behaviour itself.

In relation to financial investing, financial gain is a significant extrinsic motivator. Individuals that[grammar?] are motivated by financial gain typically hope for higher returns, and so they are often more willing to take greater risks as well (Croce et al., 2020). Investors want to generate positive returns, so they may choose to turn down offers that are below their desired level. This is further supported by research into the motives for property investors; Pawson and Martin (2021) state that the prospect of capital gain was the greatest motivator, followed by rental returns and affordability. These represent the opportunity for financial gain and is an example of extrinsic motivation, thus clearly demonstrating the effect of extrinsic motivation on financial investing.

  Case study:

Jamie would like to build wealth so that they can retire early and travel the world. Jamie has decided to start investing in order to achieve financial gain. Since Jamie is seeking an outcome, they are extrinsically motivated.

Intrinsic motivationEdit

According to Deci and Ryan (2000), intrinsic motivation is the act of doing something for the inherent satisfaction, rather than for the consequences of the action. There may be elements of intrinsic motivation when considering motivation to invest, such as passion or sentiment.

In line with the above definition of intrinsic motivation, researchers note that passion for investing is a “love for, and identification with, the investment process” (Croce et al., 2020) and that “passion entails intense positive feelings towards the engagement in the investment process with which he/she identifies and that becomes an essential part of his/herself.” (Croce et al., 2020). These strong positive feelings toward the investment process have been found to motivate investors’ actions. Additionally, regarding property investment, there is some suggestion that property purchases are motivated by sentimental drivers, rather than purely financial considerations (Pawson & Martin, 2021). This demonstrates that there are intrinsic motivators for people to engage in financial investing.

Perhaps due to the very nature of financial investing, that is to allocate resources in the hope of increasing wealth over time, extrinsic motivation does seem to be a more influential motivator, however the research does suggest that intrinsic motivation also plays a role.

  Case study:

As Jamie continues to research financial investing, they have realised that they enjoy learning about it. Later, when Jamie has started investing, they have become increasingly passionate about the investing process. This new found passion is intrinsically motivated as Jamie is performing the behaviour simply for the enjoyment of it.

Test yourself!Edit

1 Extrinsic motivation is irrelevant to financial investing:


2 A passion for investing is considered an intrinsic motivator:


Emotions and financial investingEdit

It is said that “emotions are discrete, automatic responses to universally shared, culture-specific and individual-specific events … These affective responses are preprogrammed and involuntary, but are also shaped by life experiences.” (Ekman & Cordaro, 2011). They may include physical and psychological reactions, and often affect the individual’s judgement and behaviour (Aren & Hamamci, 2020). Aren and Hamamci (2020) suggest that people often make financial decisions to alleviate emotional suffering, as well as optimise their financial position. The authors note that neoclassical finance literature has largely disregarded emotions as they affect one’s rational decision making, however Aren and Hamamci (2020) instead suggest that emotions do in fact affect all decisions, including financial decisions.

Three prominent concepts related to emotions and financial investing are regret, risk taking, and the ending effect. Regret may lead individuals to make suboptimal investing decisions. Risk taking behaviour is affected by emotions, and risk taking behaviour in turn can affect investment choices. Finally, the ending effect suggests that people strive to reach emotionally satisfactory endings, which may affect investing behaviour in some circumstances. Clearly emotions and financial investing are inextricably related.[factual?]

Regret theoryEdit

Regret is a “negative cognitively-based emotion resulting from an unfavorable counterfactual comparison between the outcomes of chosen and discarded options” (Canessa et al., 2009). In relation to investing, regret theory suggests that “many people experience the sensations we call regret and rejoicing; and … [when] making decisions under uncertainty, they try to anticipate and take account of those sensations.” (Loomes & Sugden, 1982). When an individual chooses to act on a decision, if the outcome is less desirable than they had hoped then they would likely experience regret. However, if the outcome were more desirable, they would likely rejoice at the outcome. People anticipate regret if they make a wrong choice, which can either motivate or dissuade the individual’s possible actions.

A fear of upcoming regret may influence their following actions. Berrios (2019) notes, however, that complex emotions carry useful information that assists in appraising relevant events. This suggests that this information can help people to interpret their current situation. Perhaps experiencing regret from an investment decision will help to interpret the situation. Research indeed suggests that an investor's regret over a previous order may influence the type of order they place later[factual?]. However, these "emotionally charged decisions made because of regret lead to worse outcomes for investors" (Deuskar et al., 2021). This suggests quite clearly that emotions have a significant impact on financial investing. Whilst emotions can assist one to make sense of the situation so could be helpful, relying on emotions to make decisions typically leads to poor performance.

  Case study:

Jamie recently made an investment, but investment soon decreased in value. Due to the poor outcome of this investment, Jamie regrets having made that choice. Jamie keeps thinking about how they might change their investment strategy to avoid these negative feelings in the future.

Figure 3. Financial investing can involve risk, and potential investors must be aware of this before investing their resources

Risk takingEdit

Emotions have been found to influence risk taking, which in turn, affects investing behaviour. Positive or negative emotions have been found to affect risk taking behaviour differently. Negative emotions such as fear and sadness affect investing behaviour as they are predictors of risk aversion, whilst positive emotions such as hope, and pursuit of happiness may make investors more inclined to take risks (Aren & Hamamci, 2020). Risk is the chance that actual returns are different from those expected. According to conventional portfolio theory, larger rates of return can offset proportionally higher rates of risk. Therefore, investors may have to accept higher levels of risk should they hope to receive higher returns (Croce et al., 2020). It is generally believed that people are risk averse (Xing et al., 2019), however some reasons such as a loss frame of mind or macroeconomic inequality can lead to individuals opting to undertake risk. When considering investment types, it has been found that “individuals with high risk-taking and high risky investment intention tend to move toward stocks and derivatives; people with low risk-taking and low risky investment intention are expected to prefer bonds and bank deposits.” (Aren & Hamamci, 2020). This suggests that emotions have a key role in influencing investing behaviour, as emotions may affect whether the individual chooses to invest, as well as what types of investments they may choose.

  Case study:

As Jamie is experiencing regret, a negative emotion, due to their recent investment, Jamie is feeling hesitant and risk-averse, and has decided to invest in a less risky asset class, if they can even bear to invest again at all.

Ending effectEdit

The ending effect explains that individual preference shifts toward an emotional satisfaction when they near ‘the end’, and they are motivated to act accordingly (Xing et al., 2019). Based off [awkward expression?] the socioemotional selectivity theory, it is thought that as perceived time remaining decreases, individuals tend to shift from a future-oriented goal of acquiring knowledge, to a present-oriented goal that satisfies their emotional satisfaction in the moment (Cartensen et al., 1999). An example of this is the phenomenon whereby individuals are more likely to make a risky gambling decision on a horse that is a long shot if it is the last race of the day[factual?]. In relation to the effect of the ending effect on investing, research demonstrates that “participants who received motivation priming to maximize their emotional satisfaction showed increased risk taking during the last round” (Xing et al., 2019). What this research suggests is that when individuals strive to reach emotional satisfaction, they are more likely to take risks, however, when considering the socioemotional selectivity theory as well, individuals are more inclined to attempt to reach that aforementioned emotional satisfaction if they believe they are running out of time. This has implications for investors that are working toward time-bound goals, or aging investors, as they may be driven by their emotions to take on additional risk.

  Case study:

Some time has passed, and Jamie is nearing their early retirement to travel the world. Jamie considers their upcoming retirement to be an ending of sorts, and desires to reach an emotionally satisfactory ending. As such, they have decided to make a risky investment decision in the hope that they can reach this emotionally satisfying end.

Test yourself!Edit

1 Regret has no effect on financial investing:


2 Negative emotions (eg. sadness) make people more likely to take risks:


Improving financial investing by considering motivation and emotionEdit

Understanding the effect of motivation and emotion on financial investing can affect the investor’s outcomes. There are same key strategies that can be implemented to improve one’s financial investing by considering it from the lens of motivation and emotion concepts. Namely, examples of such strategies include engaging with an investment advisor, thorough risk profiling, and dollar-cost averaging.

Figure 4. A financial advisor can be of great benefit to reduce emotionally driven investing decisions

Engaging an investment advisorEdit

One useful strategy that investors can implement is to engage a financial advisor to reduce emotional investing (See Figure 4.). Maymin and Fisher (2011) suggest that some investors engage with a financial advisor to help manage emotions, namely fear, regret and greed. They also suggest that it is the role of the financial advisor to help develop their client’s portfolio so that the client is comfortable - both in terms of emotional satisfaction and level of risk. The role of the financial advisor is particularly important in the face of market volatility (Maymin & Fisher, 2011) which one would expect is a time of significant emotions such as fear if the value of an individuals portfolio goes down due to market volatility. As such, whilst research does suggest that emotions can affect investing behaviour (Aren & Hamamci, 2020), it would appear that working with a financial advisor can help to manage these emotions.

Risk profilingEdit

The management of risk tolerance is yet another thing that should be considered when planning an investment strategy. Negative emotions are predictors of risk-aversion (Aren & Hamamci, 2020), and Van den Bergh-Lindeque et al. (2022) also note that investors likely make irrational investment decisions due to a fear of loss for the future, regardless of their level of investment knowledge. In their paper exploring risk-aversion and risk-profiling, Van den Bergh-Lindeque et al. (2022) explain that “two major elements need to be considered. These elements are risk attitude, which is the amount of risk a given investor is willing to take, and risk capacity, which refers to the amount of risk a given investor can take. Risk attitude covers psychological and personality aspects, while risk capacity covers financial aspects.” (Van den Bergh-Lindeque et al., 2022). In response, Van den Bergh-Lindeque et al. (2022) suggest risk profiling: Adequate risk profiling of investors can be useful to assess the factors that may influence the behaviour of risk-averse investors. If investors can adequately assess risk, then that can also manage negative emotions.

Dollar-cost averagingEdit

Dollar-cost averaging is a strategy in which an investor sets themselves a ‘rule’ to exchange a certain amount of money to purchase stocks across several purchases regularly according to a predetermined schedule, as opposed to purchasing the stocks all at once as a lump-sum investment (Hayes, 2022). It is a strategy that has been popular since the 1940s, and a significant reason for its popularity, despite it being inconsistent with standard finance theory, is it’s consideration of investor’s behaviour and emotions.

Statman (1995) suggests that following the predetermined rules of dollar-cost averaging reduces regret and limits the effect of lapses in self-control. It is believed that by setting a predetermined rule, the investor can reduce their feelings of responsibility should their investment lose money, and this reduced responsibility that brings about less regret (Statman, 1995). It is this reduction of regret that is especially relevant when considering emotions and financial investing. This demonstrates that understanding emotions in the context of financial investing can enable investors to employ strategies that limit the impact of emotions on investing or reduce negative emotions resulting from investing.

  Case study:

Back at the very start of Jamie's investing journey, they realised just how much psychological concepts such as motivation and emotion can affect their financial investing. As such, they were careful to implement some strategies to make the most of it. Jamie hired a financial advisor, who Jamie admits helped them to avoid making some very rash, emotionally-charged decisions. This financial advisor took Jamie through risk-profiling, which was helpful for Jamie to realise how much risk they were willing to take on. And finally, Jamie made use of dollar-cost averaging which helped reduce their emotions about investment decisions, since Jamie just stuck to their predetermined rules. Jamie can really see the value of integrating psychological science into their daily life.

Test yourself!Edit

1 Dollar-cost averaging reduces feelings of responsibility and regret:


2 A financial advisor can help to manage emotional investing:



So, what does this mean for you? How does motivation or emotions impact financial investing? And can you harness these psychological concepts to improve your financial investing? Well, financial investing is intrinsically linked with behaviour, especially motivation and emotion. The field of motivation explores why people are driven to action, and how driven they are. Two main types of motivation are extrinsic and intrinsic motivation. Each affect financial investing in their own way as individuals may make different investment decisions depending on which motivational type they are most driven by. Emotions also influence financial investing. As automatic responses to events, emotions often affect an individual’s judgement and behaviour, but were once thought to be irrelevant to financial investing. More modern approaches suggest that emotions do in fact impact financial investing, with three notable concepts being regret, risk taking, and the ending effect. Understanding how motivation and emotion affect investing is important, however it is possibly even more important to consider how one can incorporate these psychological concepts to improve their financial investing. Three key strategies are to engage an investment advisor, adequate risk profiling, and dollar-cost averaging. Whilst these strategies do largely revolve around emotions, the very act of engaging with such strategies also satiates any motivational drivers to invest, as they either deliver the outcome necessary of extrinsic motivation, or they satisfy the intrinsic motivation by simply taking part in the investing process. Overall, both motivation and emotion are highly relevant to financial investing.

See alsoEdit


Aren, S., & Hamamci, H. N. (2020). Relationship between risk aversion, risky investment intention, investment choices: Impact of personality traits and emotion. Kybernetes, 49(11), 2651–2682.

Baker, H. K., & Ricciardi, V. (2015). Understanding: Behavioral Aspects of Financial Planning and Investing. Journal of Financial Planning (Denver, Colo.), 28(3), 22–.

Berrios, R. (2019). What Is Complex/Emotional About Emotional Complexity? Frontiers in Psychology, 10, 1606–1606.

Canessa, N., Motterlini, M., Di Dio, C., Perani, D., Scifo, P., Cappa, S. F., & Rizzolatti, G. (2009). Understanding others’ regret: a FMRI study. PloS One, 4(10), e7402–e7402.

Carstensen, L. L., Isaacowitz, D. M., & Charles, S. T. (1999). Taking time seriously. A theory of socioemotional selectivity. The American psychologist, 54(3), 165–181.

Croce, A., Ughetto, E., & Cowling, M. (2020). Investment Motivations and UK Business Angels’ Appetite for Risk Taking: The Moderating Role of Experience. British Journal of Management, 31(4), 728–751.

Deci, R. M., & Ryan, E. L. (2000). Intrinsic and extrinsic motivations: Classic definitions and new directions. Contemporary Educational Psychology, 25(1), 54-67.

Deuskar, P. D., Wu, F., & Zhou, H. (2021). How does regret affect investor behaviour? Evidence from Chinese stock markets. Accounting and Finance (Parkville), 61(S1), 1851–1896.

Ekman, P., & Cordaro, D. (2011). What is Meant by Calling Emotions Basic. Emotion Review, 3(4), 364–370.

Goforth, A. (2021). Pandemic Spurs Shift in Financial, Investing Attitudes Among Millennials, Gen Z. Credit Union Times.

Hayes, A. (2022, August 19). Dollar-Cost Averaging (DCA) Explained With Examples and Considerations. Investopedia.

Loomes, & Sugden, R. (1982). Regret Theory: An Alternative Theory of Rational Choice Under Uncertainty. The Economic Journal (London), 92(368), 805–824.

Maymin, P. Z., & Fisher, G. S. (2011). Preventing Emotional Investing: An Added Value of an Investment Advisor. The Journal of Wealth Management, 13(4), 34–43.

Napoletano, E., & Curry, B. (2022, April 4). What Is Investing? How Can You Start Investing? Forbes advisor.

Pawson, H., & Martin, C. (2021). Rental property investment in disadvantaged areas: the means and motivations of Western Sydney’s new landlords. Housing Studies, 36(5), 621–643.

Picardo, E. (2022, July 22). Investing Explained: Types of Investments and How To Get Started. Investopedia.

Statman, M., (1995). A Behavioral Framework for Dollar-Cost Averaging. Journal of Portfolio Management, 22(1), 70–78.

Van den Bergh-Lindeque, A., Ferreira-Schenk, S., Dickason-Koekemoer, Z., & Habanabakize, T. (2022). What makes risk-averse investors tick? A practitioners guide. Cogent Economics & Finance, 10(1).

Xing, Meng, Y., Isaacowitz, D. M., Wen, Y., & Lin, Z. (2019). The Ending Effect in Investment Decisions: The Motivational Need for an Emotionally Rewarding Ending. Personality & Social Psychology Bulletin, 45(4), 510–527.

External linksEdit