The Psychophysiology of Real-Time Financial Risk Processing

39 Pages Posted: 18 Sep 2001  

Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER); Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL)

Dmitry V. Repin

SKOLKOVO Moscow School of Management; National Research University Higher School of Economics; Massachusetts Institute of Technology (MIT) - Sloan School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: October 2001

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 detected. In a sample of 10 traders, we find statistically significant differences in mean electrodermal responses during transient market events relative to no-event control periods, and statistically significant mean changes in cardiovascular variables during periods of heightened market volatility relative to normal-volatility control periods. We also observe significant differences in these physiological response across the 10 traders which may be systematically related to the traders' levels of experience.

Keywords: Behavioral Finance, Market Efficiency, Market Rationality, Psychology, Psychophysiology

JEL Classification: G10, G14, C91, C93

Suggested Citation

Lo, Andrew W. and Repin, Dmitry V., The Psychophysiology of Real-Time Financial Risk Processing (October 2001). MIT Sloan School of Management Working Paper No. 4223-01; MIT Laboratory for Financial Engineering Working Paper No. LFE-1039-01. Available at SSRN: https://ssrn.com/abstract=282863 or http://dx.doi.org/10.2139/ssrn.282863

Andrew W. Lo (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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National Bureau of Economic Research (NBER) ( email )

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Massachusetts Institute of Technology (MIT) - Computer Science and Artificial Intelligence Laboratory (CSAIL)

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Dmitry V. Repin

SKOLKOVO Moscow School of Management ( email )

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National Research University Higher School of Economics ( email )

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Moscow, Moscow 119017
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Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

Lab for Financial Engineering
Cambridge, MA 02142
United States

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