Skillsfirst Level 5 Diploma in Financial Trading (RQF) - Module 4 - Technical Analysis
Skillsfirst Level 5 Diploma in Financial Trading (RQF) - Module 5 - Psychology
Skillsfirst Level 5 Diploma in Financial Trading (RQF) - Module 6 - Risk and Money Management
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During its early history, psychological concepts played an important role in economic theory. Through works by leading 18th-19th Century economists and philosophers such as Jeremy Bentham and Adam Smith, the concept of Utility (as well as the psychological definition of it) became central to economic theory. However, economists began to move away from psychology during the so-called neo-classical period as they sought to redefine the field more like a natural science – complete with certain laws and assumptions similar to fields such as physics or chemistry.

This led to the development of Homo Economicus (or Economic Man), whose psychological profile was profoundly rational. Despite this however, psychology still played an important role in the analysis of many important neo-classical economics such as Vilfredo Pareto, Irving Fisher and John Maynard Keynes.

By the mid-20th Century however, psychology had largely disappeared from the field as economists increasingly sought to use technology such as computers to build ever-increasingly complex and sophisticated models of the economy to explain its inner workings. However, the Expected Utility and Discounted Utility models led to a resurgence of psychological research in economics, primarily due to the fact that these models generated testable hypotheses about things like decision making under uncertainty and consumption patterns.

In addition, the 1960s saw cognitive psychology being used to describe the human brain as a highly complex and sophisticated information processing machine, with pioneers such as Ward Edwards, Amos Tversky and Daniel Kahneman using models that they had developed themselves to actually test how people really behaved and made decisions under uncertainty, and then comparing their findings against traditional economic theory. Because the most important of these findings was published in 1979 by Kahneman and Tversky in their paper ‘Prospect Theory: Decision Making Under Risk’ – a work which strongly challenged many of the assumptions made by classic economic theorists.

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