Fear and Financial Contagion: Modeling Animal Spirits in Asset Markets
Year: 2026
Type: preprint
Abstract: Using classic equations from cognitive neuroscience, we introduce fear into a model of trading behavior. Fear is modeled as an agent-level state variable with its own autonomic dynamics. Using this framework, we show that financial contagion can emerge as a byproduct of fear-driven responses, by fundamental investors, to negative news. Employing Bayesian model selection techniques, we show that incorporating these dynamic animal spirits substantially improves the model’s fit to real market data relative to standard formulations that exclude fear. Our model also clarifies how fear-driven behavior within one group of investors propagates throughout the market ecosystem via endogenous price feedback.
Authors: Francesco Renzini, Joshua M. Epstein
Language: English
Subfield: Economics and Econometrics
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W7165392502