A Kinetic Thermodynamics Approach to the Psychology of Fluctuations in Financial Markets

We derive a set of equations which are a simple model for investor behavior in a theoretical financial market. The model incorporates the emotional aspect of investor sentiment with memory of price history which decays exponentially in time. Within this model, the emotional reaction of the body of investors is to buy when the recent price has been increasing and sell when it has been decreasing. The rational motivations are based on capitalizing on the difference between the price and intrinsic value, with the possibility of some inertia in taking action. These two competing effects provide the basis for fluctuations and instability