How emotions shape market cycles

The fundamentals to understand

The market operates according to a predictable emotional cycle. Optimism, greed, fear, and panic - emotional states deeply rooted in our brain biology - directly guide bullish and bearish trends. These emotions are not character flaws, but the result of complex neurological processes that we all share.

Psychological traps are ubiquitous: FOMO (fear of missing out), loss aversion, and cognitive dissonance regularly push investors to make choices contrary to logic. Social media amplifies these emotional distortions, while our mirror neurons lead us into collective behaviors and herd speculation.

The psychological market cycle decoded

Bullish phase: when the brain gets seduced

During bullish phases, optimism floods the markets. Rising prices generate enthusiasm, which activates the brain's reward system and triggers a release of dopamine. This neurochemical cascade creates a feeling of euphoria that is very difficult to resist.

FOMO amplifies this dynamic exponentially. Our brain circuits are biologically programmed to seek social inclusion and fear exclusion. When social media platforms like X and Reddit showcase stories of spectacular gains, this pressure intensifies. Investors buy without truly understanding the risks.

Meme coins perfectly illustrate this mechanism. Take phenomena like Dogecoin, Shiba Inu, or the more recent TRUMP and MELANIA: their value primarily comes from speculative hype and viral trends, not from fundamental metrics. Traders get swept up in collective euphoria, ignoring warning signals: overvaluation, unsustainable growth, lack of fundamentals.

This convergence of neurobiological processes creates uncontrolled optimism that can lead to massive financial bubbles, where prices far exceed the actual value of assets. But bubbles always burst.

Bearish phase: the amygdala takes control

When the reversal occurs, emotions pivot sharply: from optimism to denial, then to fear. The amygdala - the brain structure processing fear - takes the reins, triggering instinctive survival reactions. This is the moment when panic selling occurs.

A powerful mechanism amplifies fear: loss aversion. Our brain feels the sting of loss much more intensely than it enjoys the pleasure of gain. As prices plummet, fear turns into panic, and then into resignation. At this critical point, investors liquidate their positions en masse, often suffering devastating losses.

Observe the significant bear markets, such as the sharp corrections of Bitcoin during the 2022 cycle: what is at play is a psychological battle where the survival instinct overrides rational judgment.

Market stabilization generally occurs when pessimism reaches its peak. It is then that an accumulation phase emerges, where prices move sideways. Some savvy investors begin to re-enter the market, driven by hope and a budding optimism.

The brain mechanisms that control the market cycle

The reward system and dopamine

A series of neurological processes underlie market cycles. The reward system is at the heart of this mechanism, driven by dopamine, the neurotransmitter associated with pleasure and rewards.

When you are exposed to a rewarding stimulus - for example, the announcement of a price increase - your brain reacts by releasing dopamine. This phenomenon is particularly intense during bull markets: the dopaminergic system anticipates financial rewards, creating a feedback loop that reinforces speculative buying behavior.

Dopamine is synthesized in the substantia nigra and the ventral tegmental area, then takes several pathways to reach different regions of the brain. The mesolimbic pathway is particularly important for market psychology. It connects the ventral tegmental area to the limbic system, including the amygdala. This connection is crucial for experiencing pleasure and satisfaction. When anticipating financial gains, the dopamine released in this pathway creates intense motivation and a feeling of satisfaction.

The amygdala: guardian of fear

The amygdala plays a central role in bearish phases just as dopamine does in bullish phases. An evolutionary survival mechanism, the amygdala triggers the “fight or flight” response. In a financial context, this reaction leads to impulsive decisions that often result in losses.

When fear and anxiety are activated in the amygdala, they distort the decision-making process and push for reflexive actions such as panic selling. Meanwhile, cognitive dissonance can lead investors to hold onto their assets through denial, hoping for a market recovery.

Cognitive dissonance emerges when the perception of reality conflicts with reality itself. It involves the prefrontal cortex - responsible for higher cognitive functions - and the limbic system, including the amygdala and hippocampus.

Mirror neurons and herd instinct

A fascinating aspect of neurobiology affecting market psychology concerns mirror neurons. Distributed in several areas of the brain such as the premotor cortex, supplementary motor area, and parietal lobes, these neurons activate both when performing an action and when observing someone else doing it.

Essentially, mirror neurons allow us to vicariously experience the emotions and actions of others. They play a major role in empathy and social influence. Watching other traders succeed triggers these neurons, leading to imitation and herd instinct - a fundamental factor explaining why so many investors blindly follow the movements of the crowd.

The TRUMP phenomenon: dissecting a complete cycle

( 1. The phase of dopaminergic euphoria

The explosive launch of the meme coin TRUMP perfectly illustrates the reward system in action. Several factors have likely converged: the association with a globally recognized personality embodying wealth, massive media coverage, and the allure of quick returns. FOMO played a decisive role.

This initial rise likely triggered the dopaminergic pathways in traders, releasing dopamine in anticipation of financial rewards. A feedback loop was created, fueling excitement and speculation. This stage corresponds to the so-called “euphoria phase,” where optimism and excitement drive a continuous increase in prices.

) 2. The herd instinct intensified by social networks

Mirror neurons play a crucial role in this herd instinct. The rapid growth of TRUMP is largely explained by the fact that individuals, influenced by the emotions and apparent success of other traders, make decisions motivated by a collective sentiment rather than by independent rational analysis.

Several factors have amplified this gregarious behavior:

• Viral culture and memes: activity on social media has created a contagious excitement. Mirror neurons have amplified positive emotions in other participants, encouraging them to join the movement.

• Community Mobilization: Political engagement and the fan community have increased the visibility and adoption of the token. A positive market sentiment spread rapidly through these social interactions, illustrating how herd instinct, reinforced by mirror neurons and amplified by meme culture, shapes market trends.

3. Correction: volatility and panic

After its initial rise, TRUMP, like most meme coins, experienced significant volatility and considerable price declines. At this point, traders went through denial, fear, and anxiety.

Cognitive dissonance has led many to maintain their positions despite the decline, in the hope of a recovery or out of conviction in the value of the asset. This conflict between reality and personal beliefs has fueled irrational decisions and financial losses.

At the same time, the amygdala amplified fear and anxiety, leading to panic selling. The emergence of MELANIA, a direct competitor, exacerbated these emotional reactions, demonstrating how external factors can strongly influence individual investor behavior and, by extension, market cycles.

Use this understanding to your advantage

Mastering the psychology that drives market cycles offers tangible benefits. By observing emotional trends, you can identify periods of extreme pessimism or optimism and anticipate their impacts on prices.

Familiarizing yourself with neurobiological processes - the dopaminergic pathways during bullish phases, the role of the amygdala during bearish phases, the function of mirror neurons in collective behavior - enhances your understanding of market cycles.

This knowledge significantly increases your chances of avoiding common psychological traps: cognitive biases, FOMO, panic selling, and cognitive dissonance. By recognizing these mechanisms at work in your own mind, you gain the ability to maintain a rational and disciplined investment strategy, even when euphoria or fear dominate the markets.

Understanding the market cycle from a neurobiological perspective transforms your perception of volatility: these are not just price movements, but a reflection of the collective psychology playing on the deepest structures of our brain.