Emotional Engagement and Trading Performance

Abstract

Emotional involvement is known to be necessary but not sufficient for good decision-making in the face of uncertainty. It has been conjectured that emotional engagement in anticipation of risky outcomes constitutes ``good'' emotions. We introduce a new methodology to determine whether anticipatory emotional engagement is beneficial in the context of trading in financial markets. We focus on heart rate changes because they occur at a sufficiently high frequency to discern timing relative to events in the marketplace. After conservatively adjusting for multiple hypothesis testing, we find that participants whose heart rate changes anticipate their order submissions at inflated prices earn significantly more, while participants whose heart rate responds to their trades earn significantly less. By investigating co-integration between skin conductance response and the dynamics of individual portfolio values, we confirm the importance of emotional involvement in determining who makes or loses money.

Keywords: Financial Markets, Emotions, Decision-Making, Asset Pricing, SCR, ECG

JEL Classification: C92, G02, D87, G12