Fight or Freeze? Individual Differences in Investors’ Motivational Systems and Trading in Experimental Asset Markets

published version of this discussion paper available: K. Muehlfeld, U. Weitzel, A. van Witteloostuijn (2013): “Fight or Freeze? Individual Differences in Investors’ Motivational Systems and Trading in Experimental Asset Markets”, Journal of Economic Psychology, 34: 195-209

34 Pages Posted: 31 Oct 2012 Last revised: 10 Feb 2013

See all articles by Katrin Muehlfeld

Katrin Muehlfeld

University of Trier - Faculty of Management; Utrecht University - Utrecht University School of Economics

Utz Weitzel

Utrecht University - Utrecht University School of Economics; Radboud University - Economics Department, IMR

Arjen van Witteloostuijn

University of Antwerp

Date Written: August 1, 2012

Abstract

We analyze investors’ trading behavior, particularly their coping with fundamental shocks in asset value, depending on individual differences in the sensitivity of two basic neurophysiological systems — the Behavioral Approach System (BAS), the ‘driving force’ of human behavior, and the Behavioral Inhibition System (BIS), its ‘braking system’. By analyzing 15 independent experimental asset markets with a total of 171 participants, we find that differences in BAS and BIS sensitivity affect trading in both ‘normal’ and shock-trading environments: under normal trading conditions, individuals with a more sensitive BAS are more active traders, prefer riskier portfolios, and generate higher individual overall profits. High BIS subjects generate lower scalping and overall profits. Fundamental shocks generally reinforce the preference of high BAS investors for riskier portfolios, while positive shocks ‘unfreeze’ high BIS investors: they trade more frequently and generate higher profits. At the market level, normal trading in markets with a high BIS median is associated with lower volatility, compared to low BIS median markets, while greater concentration of traders’ BAS scores around the mean is associated with better efficiency and liquidity, compared to markets with lower BAS kurtosis. In high BIS median markets, positive shocks lead to improved efficiency, lower bid-ask spread, and lower volatility. We observe no significant differences in market-level reactions to negative shocks.

Keywords: Individual decision making, Investment decisions, Behavioral Approach System/Behavioral Inhibition System, Experimental asset markets, Fundamental shocks

Suggested Citation

Muehlfeld, Katrin and Weitzel, Utz and van Witteloostuijn, Arjen, Fight or Freeze? Individual Differences in Investors’ Motivational Systems and Trading in Experimental Asset Markets (August 1, 2012). published version of this discussion paper available: K. Muehlfeld, U. Weitzel, A. van Witteloostuijn (2013): “Fight or Freeze? Individual Differences in Investors’ Motivational Systems and Trading in Experimental Asset Markets”, Journal of Economic Psychology, 34: 195-209. Available at SSRN: https://ssrn.com/abstract=2168758

Katrin Muehlfeld

University of Trier - Faculty of Management ( email )

Germany

Utrecht University - Utrecht University School of Economics ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, +31 30 253 7373 3584 EC
Netherlands

Utz Weitzel (Contact Author)

Utrecht University - Utrecht University School of Economics ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, 3584 EC
Netherlands

Radboud University - Economics Department, IMR ( email )

Nijmegen, 6500 HK
Netherlands

Arjen Van Witteloostuijn

University of Antwerp ( email )

Prinsstraat 13
Antwerp, Antwerp 2000
Belgium

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