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Investors’ fear can be rational, emanating from the natural dynamics of economic fundamentals, or it can be quasi rational and not attributable to any known risk factors. Using VIX from Chicago Board Options Exchange as a proxy for investors’ fear, the purpose of this paper is to consider the following research questions: to what extent does noise play a role in the formation of investors’ fear? To what extent is the impact of fear on S&P 500 index returns driven by rational reactions to new information vs fear induced by noise in stock market returns? To what extent do S&P 500 index returns display asymmetric behavior in response to investor’s rational and quasi rational fear?

In a two-step process, the authors first decompose investors’ fear into its rational and irrational components by generating two additional variables representing fear induced by rational expectations and fear due to noise. The authors then estimate a three-vector autoregression (VAR) model to examine their relative impact on S&P 500 returns.

Impulse responses generated from a 13-variable VAR model show that investors’ fear is driven by risk factors to some extent, and this extent is well captured by the Fama and French three-factor and the Carhart four-factor models. Specifically, investors’ fear is negatively related to the market risk premium, negatively related to the premium between value and growth stocks, and positively related to momentum. The magnitude and duration of the impact of the market risk premium is almost twice that of the impact of the premium on value stocks and the momentum of investors’ fear. However, almost 90 percent of the movement in investors’ fear is not attributable to the 12 risk factors chosen in this study and thus may be largely irrational in nature. The impulse responses suggest that both rational and irrational fear have significant negative effects on market returns. Moreover, the effects are asymmetric on S&P 500 index returns wherein irrational upturns in fear have a greater impact than downturns. In addition, the component of investors’ fear driven by irrationality or noise has more than twice the impact on market returns in terms of magnitude and duration than the impact of the rational component of investors’ fear.

The results are consistent with the view that one of the most important drivers of stock market returns is irrational fear that is not rooted in economic fundamentals.

James March argued that irrational approaches to problem solving and foolishness can be useful for addressing complex problems. Grand challenges are complex problems that often involve “guarded societal institutions” – societal beliefs and practices guarded by political or commercial powers. To explain how organizations with impossible goals dismantle such institutions by mobilizing irrationality and foolishness, we develop a process model which is illustrated with the case of People for the Ethical Treatment of Animals. Our main contribution is to expand James March’s ideas on logics of action and organizational intelligence to advance a novel perspective for tackling big societal problems. We argue that foolishness is not only a means for finding distant solutions to complex problems but also a means for generating sustained motivation, well-being, and ideas that spark debate and lead to the questioning of taken-for-granted societal beliefs.

Despite its devastating nature, the COVID-19 pandemic has also catalyzed a substantial surge in the adoption and integration of technological tools within economies, exerting a profound influence on the dissemination of information among participants in stock markets. Consequently, this present study delves into the ramifications of post-pandemic dynamics on stock market behavior. It also examines the relationship between investors' sentiments, underlying behavioral drivers and their collective impact on global stock markets.

Drawing upon data spanning from 2012 to 2023 and encompassing major world indices classified by Morgan Stanley Capital International’s (MSCI) market and regional taxonomy, this study employs a threshold regression model. This model effectively distinguishes the thresholds within these influential factors. To evaluate the statistical significance of variances across these thresholds, a Wald coefficient analysis was applied.

The empirical results highlighted the substantive role that investors' sentiments and behavioral determinants play in shaping the predictability of returns on a global scale. However, their influence on developed economies and the continents of America appears comparatively lower compared with the Asia–Pacific markets. Similarly, the regions characterized by a more pronounced influence of behavioral factors seem to reduce their reliance on these factors in the post-pandemic landscape and vice versa. Interestingly, the post COVID-19 technological advancements also appear to exert a lesser impact on developed nations.

This study pioneers the investigation of these contextual dissimilarities, thereby charting new avenues for subsequent research studies. These insights shed valuable light on the contextualized nexus between technology, societal dynamics, behavioral biases and their collective impact on stock markets. Furthermore, the study's revelations offer a unique vantage point for addressing market inefficiencies by pinpointing the pivotal factors driving such behavioral patterns.

The purpose of this paper is to examine the debate on whether psychology affects asset prices using agent-based modeling.

The authors set up three simulation regimes where the first regime contains fundamental investors who invest based on the mean-variance framework. The second regime includes purely irrational investors who invest based on behavioral biases. The third regime combines the two types of investors. The authors test whether the return properties from regime 3 converge to that of regime 1 or 2.

Results suggest that the type of irrationality affects return properties in different ways. Irrational investors who are introspective in their irrationality, only examining their performance and deficiencies, do not have much of a systematic effect on stock returns when combined with rational investors. However, irrational investors that aggregate information in an irrational manner have a systematic effect when combined with rational investors.

Research implication of using simulation analysis is that the results need to be verified via other methods such as empirical and/or experimental analysis.

Practical implications of the research is that policy makers can look for factors that investors use to aggregate to better understand the movement of financial prices and ignore other factors.

Social implication is that mass psychology impacts financial prices.

No other paper has used agent-based/behavioral analysis to better understand how different types of behavior may impact financial prices in different ways.

This paper aims to discuss the crises of free market capitalism in terms of its understanding of human nature. It reveals how recent market madness can be attributed to certain elements of human nature.

The paper uses a conceptual and philosophical approach to analyze crises of free market capitalism. It links both success and failure of capitalism to its understanding of human nature. It compares and contrasts economic assumptions of human nature in conventional and Islamic economics. It attempts to explain the 2008 financial crisis through a comprehensive theory of human nature.

It sheds some light on the irrational aspect of human nature as the driving factor behind the 2008 financial crisis. It elaborates on the importance of knowing self for knowing human decisions in free market economy. It concludes with the need for a comprehensive theory of human nature to predict and prevent irrational and irresponsible behaviors of populist politicians, greedy capitalists and conspicuous consumers. The paper also reflects on the 2013 Nobel Prize in economics as a victory for the study of human nature.

The paper offers a new perspective to understand crises of free market capitalism.

This study aims to critically review recent contributions to the methodology of financial economics and discuss how they relate to one another and directions for further research.

A critical review of recent literature on new methodologies for financial economics.

Recent books have made important contributions to the study of financial economics. They suggest new approaches that include an emphasis on radical uncertainty, adaptive markets, agent-based modeling and narrative economics, as well as extensions of behavioral finance to include concepts such as diagnostic expectations. Many of these contributions can be seen more as complements than substitutes and provide fruitful directions for further research. Efficient markets can be seen as holding under particular circumstances. A major them of most of these contributions is that the study of financial crises and other aspects of financial economics requires the use of multiple theories and approaches. No one approach will be sufficient.

There are great opportunities for further research in financial economics making use of these new approaches.

These recent contributions can be quite useful for improved analysis by researchers, private participants in the financial sector and macroeconomic and regulatory officials.

Provides an introduction to these new approaches and highlights fruitful areas for their extensions and applications.

Based in the discipline of applied consultancy‐research, this paper seeks to present a synthesis‐review of the social dynamics underlying the stalled negotiations of the United Nations Framework Convention on Climate Change. Its aim is to enhance understanding of the processes involved, to offer a working agenda to the organizational learning community, and to act as a dynamic and interpretive intervention in the negotiation process.

The methodological approach draws on a wide range of tools from the consultancy‐research domain including force‐field analysis of complex social behaviour, informal interviews, direct participation, existential reflection and process analysis, delineation of power dynamics, literature survey and psychoanalytic exploration of the irrational and unconscious factors involved.

Several findings emerged from the consultancy research. The force‐field analysis revealed the intensity of polarisation experienced at every point of the negotiation. Economic vested interests and political dynamics blocked all possibility of effective decision making and drove irrational attacks on the validity of climate science as a way of manipulating public opinion. The influence of unconscious factors was paramount, rooted in the re‐stimulation of collective pre‐traumatic‐stress disorder, and mediated via a set of social defences against anxiety.

Significant limitations in the methodology concern the level of subjectivity involved. The development of working hypotheses was exposed to constant review to check for researcher‐specific projection and selectivity of significant data.

The practical implications of the paper for the development and application of organizational learning are spelled out in the final section. Particular attention is drawn to the need to take account of irrational and unconscious phenomena driving social psychodynamics.

The paper represents profoundly original work, emanating from the author's wide‐ranging involvement in the content and process of the international climate‐change negotiations.

The purpose of this paper is to study merger momentum and its driving factors in China by sampling 376 listed bidders from 2008 to 2013.

The empirical model captures the dependency of market reaction on recent merger and stock market states. The independent variables are designed from two dimensions, i.e. at the level of market-wide as an integral and bidder-specific as individuals. Furthermore, both the market and bidding firms contain merger momentum and market momentum, respectively.

The empirical results show that there is merger momentum in the market. Particularly, merger momentum is significant both in short run and long run for the mergers with cash payment, which supports the synergy effect. It also implicates the mergers with stock driven by investor sentiment. Besides, investors’ over-optimism is significant in the bull markets while managerial hubris is found in the bear markets.

The driving factors for merger momentum in China are complex. Three impacts with different effects interact with one another. They are investor sentiment and managerial hubris with negative effects resulting in reversal abnormal return in the long run, and synergies with positive shocks resulting in no reverse at all. The limitation of the paper is insufficient analysis of the mergers financed by stocks, which will be the focus for future study.

The conclusions of the study help to intensify the understanding of the immature and unnormalized capital market in China. The empirical analyses give some inspiration and suggestions to three parties in the market, i.e. investors, bidding firms and regulators, respectively.

There are three contributions. The first one is to provide a novel model to identify how these different effects work on the merger momentum. The second one is the measurement of investor sentiment from different perspectives. The last but most important one is the new findings with novel explanations, which proves that the impacts on merger momentum are complex.

This study aims to explore the challenges that the escalation of commitment poses to information security.

Two distinct scenarios of escalation behavior are presented based on literature review. Psychological, organizational and economic theories on escalation of commitment are reviewed and applied to the area of information security.

Escalation of commitment involves continuation of a course of action after receiving negative information about it. In the information security compliance context, escalation affects a firm when an employee decides to break the firm’s information security policy to complete a failing task. In the information security investment context, escalation occurs if a manager continues investment in policies and solutions that are ineffective because of psychological, organizational or economic factors. Both of these types of escalation may be prevented with de-escalation techniques including a change in management or rotation of duties, monitoring, auditing and governance mechanisms.

Implications of escalation of commitment behavior for information security decision-makers and for future research are discussed.

This study complements the literature by establishing the context of escalation of commitment in decisions related to information security and reviewing managerial and economic theories on escalation of commitment.

The purpose of this paper is to investigate the historical advancements attained on the bounded rationality concept in management research, considering the key influencing discoveries in related fields. Understanding the cross-fertilization that has occurred is the first step to go beyond the current knowledge on bounded rationality and to face its challenges.

The adopted method is historical. This research approach helps to explain the evolution of a widespread concept in a scientific field and, particularly, to identify the parallel influencing advancements made in related domains.

Investigation of the irrational forces of human reasoning is at the centre of today’s research agenda on rationality in organizations, claiming to be an extension of the original bounded rationality concept. In this regard, scholars should commit themselves to build a more holistic approach to the investigation of human rationality, conjointly applying socio-biological and behavioural perspectives to explain the real behaviour of people in organizations and society. This reconnection will also help to overcome the inner limits of some “fashion of the month” streams that have yet to demonstrate their contribution.

This is the first study that offers an overall historical evolution of the bounded rationality concept which considers both management research and developments in related fields. The historically educed lessons learned are at the basis of the concluding recommendations for future research.