IOP3708 2025 ASSIGNMENT 7 2025 IOP3708 2025
DISCLAIMER
THE DOCUMENT PRESENTED IS A DEMOSTRATION ON HOW STUDENTS CAN
APPROACH THE ASSIGNMENT FOR IOP3708. IT IS BASED ON PRESCRIBED MATERIAL
AND EXTERNAL RESEARCH. THE DOCUMENT CONTAINS BOTH SHORT NOTES AND A
RESPONSE EXAMPLE FOR EACH QUESTION. STUDENTS ARE THEREFORE ADVISED
NOT TO COPY AND PASTE BUT USE THE DOCUMENT AS A RESEARCH GUIDE THAT
WOULD HELP THEM DRAFT THEIR OWN FINAL COPIES.
, IOP3708 2025 ASSIGNMENT 7 2025 IOP3708 2025
QUESTION 1
1.1 The Triunity Theory of the Market: Mood, Mind, and Body
The Triunity Theory of the Market provides a holistic framework that integrates the
emotional, cognitive, and physical dimensions of investor behaviour. It highlights how
the mood, mind, and body collectively drive market actions and outcomes (Ackert &
Deaves, 2010). The theory suggests that financial markets mirror human
neuropsychology, with investors’ emotional states, thought processes, and physical
responses influencing decisions, price dynamics, and volatility. This framework
challenges traditional finance, which assumes rational, utility-maximising agents, by
introducing the behavioural complexity of real-world decision-makers. In behavioural
finance, this model connects directly to the neuroscience of the brain, where specific
structures such as the amygdala and frontal lobe mediate emotion and reasoning,
affecting how risk, reward, and uncertainty are perceived (IOP3708 Study Guide,
2018:41–43).
1.1.1 The Mood of the Market: Emotional Sentiment and Risk Attitude
The “mood” dimension of the market represents the emotional and affective state of
investors. Emotions such as fear, greed, pride, and regret influence investment
choices and aggregate market sentiment (Ackert & Deaves, 2010:50). In
neuroeconomic terms, mood corresponds to activity in the amygdala, the part of the
brain responsible for automatic emotional reactions like fear and anger (IOP3708
Study Guide, 2018:42). Market mood often manifests as herding behaviour or panic
selling, where collective emotion overrides rational analysis. For instance, during
financial crises, heightened anxiety increases risk aversion, causing asset sell-offs and
price declines. Conversely, exuberant moods can create asset bubbles, as seen
during the dot-com and cryptocurrency booms. Thus, mood fluctuations explain
deviations from efficient market theory, as sentiment-driven investors alter price
equilibrium through collective irrationality. Understanding market mood is essential for
behavioural finance researchers who seek to quantify emotional effects through
sentiment indices or volatility metrics.0717513144
1.1.2 The Mind of the Market: Cognitive Processes and Decision Biases
DISCLAIMER
THE DOCUMENT PRESENTED IS A DEMOSTRATION ON HOW STUDENTS CAN
APPROACH THE ASSIGNMENT FOR IOP3708. IT IS BASED ON PRESCRIBED MATERIAL
AND EXTERNAL RESEARCH. THE DOCUMENT CONTAINS BOTH SHORT NOTES AND A
RESPONSE EXAMPLE FOR EACH QUESTION. STUDENTS ARE THEREFORE ADVISED
NOT TO COPY AND PASTE BUT USE THE DOCUMENT AS A RESEARCH GUIDE THAT
WOULD HELP THEM DRAFT THEIR OWN FINAL COPIES.
, IOP3708 2025 ASSIGNMENT 7 2025 IOP3708 2025
QUESTION 1
1.1 The Triunity Theory of the Market: Mood, Mind, and Body
The Triunity Theory of the Market provides a holistic framework that integrates the
emotional, cognitive, and physical dimensions of investor behaviour. It highlights how
the mood, mind, and body collectively drive market actions and outcomes (Ackert &
Deaves, 2010). The theory suggests that financial markets mirror human
neuropsychology, with investors’ emotional states, thought processes, and physical
responses influencing decisions, price dynamics, and volatility. This framework
challenges traditional finance, which assumes rational, utility-maximising agents, by
introducing the behavioural complexity of real-world decision-makers. In behavioural
finance, this model connects directly to the neuroscience of the brain, where specific
structures such as the amygdala and frontal lobe mediate emotion and reasoning,
affecting how risk, reward, and uncertainty are perceived (IOP3708 Study Guide,
2018:41–43).
1.1.1 The Mood of the Market: Emotional Sentiment and Risk Attitude
The “mood” dimension of the market represents the emotional and affective state of
investors. Emotions such as fear, greed, pride, and regret influence investment
choices and aggregate market sentiment (Ackert & Deaves, 2010:50). In
neuroeconomic terms, mood corresponds to activity in the amygdala, the part of the
brain responsible for automatic emotional reactions like fear and anger (IOP3708
Study Guide, 2018:42). Market mood often manifests as herding behaviour or panic
selling, where collective emotion overrides rational analysis. For instance, during
financial crises, heightened anxiety increases risk aversion, causing asset sell-offs and
price declines. Conversely, exuberant moods can create asset bubbles, as seen
during the dot-com and cryptocurrency booms. Thus, mood fluctuations explain
deviations from efficient market theory, as sentiment-driven investors alter price
equilibrium through collective irrationality. Understanding market mood is essential for
behavioural finance researchers who seek to quantify emotional effects through
sentiment indices or volatility metrics.0717513144
1.1.2 The Mind of the Market: Cognitive Processes and Decision Biases
