Paper: arXiv 2510.23175

Authors: Claire Barraud

Abstract

This article proposes a complementary theoretical framework in behavioural finance by interpreting financial markets during boom-and-bust episodes as a Le Bonian crowd. While behavioural finance has documented the limits of individual rationality through biases and heuristics, these contributions remain primarily microeconomic. A second, more macroeconomic strand appears to treat market instability as the aggregated result of individual biases, although it generally does so without an explicit theoretical account of how such aggregation operates. In contrast, this paper adopts a macro-psychological -and therefore macroeconomic -perspective, drawing on classical crowd psychology (Le Bon, 1895; Tarde, 1901; Freud, 1921). The central claim is that during speculative booms and crashes, markets behave as psychological crowds governed by unconscious processes, suggestion, emotional contagion, and impulsive action. These episodes cannot be understood merely as the sum of individual departures from rationality, but as the emergence of a collective mental state that follows its own psychological laws. By reintroducing crowd psychology into behavioural finance, this paper clarifies the mechanisms through which market-wide irrationality arises and offers a theoretical foundation for a macrobehavioural understanding of financial instability.

Complexity vs Empirical Score

  • Math Complexity: 1.0/10
  • Empirical Rigor: 1.5/10
  • Quadrant: Philosophers — conceptual discussion, limited math and data

Why this score: The paper provides a purely conceptual and historical theoretical framework connecting classic crowd psychology (Le Bon, Freud) to macroeconomic behavioral finance. It contains no mathematical formulas, empirical dataset analysis, quantitative modeling, or backtesting.

Research Flowchart

  flowchart TD
    A["Research Goal: Explain macro-level financial instability<br>during boom-and-bust episodes"] --> B["Input: Integration of Classical Crowd Psychology<br>(Le Bon, Tarde, Freud) & Behavioral Finance"]
    
    B --> C["Theoretical Synthesis: Shift from micro-biases<br>to macro-psychological crowd dynamics"]
    
    C --> D["Core Mechanism: Aggregation via suggestion,<br>emotional contagion, & unconscious processes"]
    
    D --> E["Outcome: Emerging collective mental state<br>governed by distinct psychological laws"]
    
    E --> F["Key Finding: Macro-behavioral framework explaining<br>market instability beyond individual rationality"]