The Psychophysiology of Real-Time Financial Risk Processing
Andrew W. Lo
Massachusetts Institute of Technology (MIT) - Sloan School of Management; Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL); National Bureau of Economic Research (NBER)
Dmitry V. Repin
SKOLKOVO Moscow School of Management; National Research University Higher School of Economics; Massachusetts Institute of Technology (MIT) - Sloan School of Management
NBER Working Paper No. w8508
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.
Number of Pages in PDF File: 34working papers series
Date posted: September 29, 2001
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