Emotional Engagement and Trading Performance

32 Pages Posted: 4 Sep 2020

See all articles by Peter Bossaerts

Peter Bossaerts

University of Melbourne - Department of Finance

Felix Fattinger

University of Melbourne - Department of Finance

Kristian Rotaru

Department of Accounting, Monash Business School

Katherine Xu

University of Melbourne

Date Written: April 27, 2020

Abstract

Extensive research in neuroscience proves that rational decision-making depends on accurate anticipative emotions. We test this proposition in the context of financial markets. We replicate a multi-period trading game that reliably generates bubbles, while tracking participants’ heart rate and skin conductance. We find that participants whose heart rate changes in anticipation of trading at inflated prices achieve higher earnings. In contrast, when such trades precede heart rate changes, earnings decrease. Higher (lower) earnings accrue to participants whose skin conductance responds to the market value of stock (cash) holdings. Our findings demonstrate that emotions are integral to sound financial decision-making.

Keywords: Financial Markets, Trading, Emotions, Bubbles and Crashes, Experimental Economics

JEL Classification: C92, G02, D87, G12

Suggested Citation

Bossaerts, Peter L. and Fattinger, Felix and Rotaru, Kristian and Xu, Kaitong, Emotional Engagement and Trading Performance (April 27, 2020). Available at SSRN: https://ssrn.com/abstract=3661137 or http://dx.doi.org/10.2139/ssrn.3661137

Peter L. Bossaerts (Contact Author)

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Department of Finance
Carlton, Victoria 3010
Australia

HOME PAGE: http://bmmlab.org

Felix Fattinger

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010
Australia

Kristian Rotaru

Department of Accounting, Monash Business School ( email )

900 Dandenong Rd
Caulfield East, Victoria 3145
Australia
+613-990-34567 (Phone)

Kaitong Xu

University of Melbourne ( email )

Melbourne
Australia

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