Working Paper: NBER ID: w8508
Authors: Andrew W. Lo; Dmitry V. Repin
Abstract: A longstanding controversy in economics and finance is whether financial markets are governed by rational forces or by emotional responses. We study the importance of emotion in the decisionmaking process of professional securities traders by measuring their physiological characteristics, e.g., skin conductance, blood volume pulse, etc., during live trading sessions while simultaneously capturing real-time prices from which market events can be defined. In a sample of 10 traders, we find significant correlation between electrodermal responses and transient market events, and between changes in cardiovascular variables and market volatility. We also observe differences in these correlations among the 10 traders which may be systematically related to the traders' levels of experience.
Keywords: financial risk; psychophysiology; trading behavior; emotional responses
JEL Codes: G10; G14; C91; C93
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| heightened emotional responses (D91) | observable market fluctuations (G10) |
| physiological indicators (I11) | transient market events (G14) |
| changes in cardiovascular variables (I11) | market volatility (G17) |
| experience levels (J24) | variability in correlations (C10) |