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The Psychophysiology of Real-Time Financial Risk Processing

34 Pages Posted: 29 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 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.

Suggested Citation

Lo, Andrew W. and Repin, Dmitry V., The Psychophysiology of Real-Time Financial Risk Processing (October 2001). NBER Working Paper No. w8508. Available at SSRN: https://ssrn.com/abstract=285635

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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