Emotional Engagement and Trading Performance

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