Dynamics of Stock Market Developments, Financial Behavior, and Emotions

Abstract

We explore in a series of incentivized experiments how stock market developments affect emotional arousal (proxied by pupil dilation, electrodermal activity, and heart rate variation), and how this emotional arousal in turn affects investment behavior. Experiencing stock market downswings increases emotional arousal (e.g., fear), while upswings do not trigger such an effect. The subsequent interplay between emotional arousal and investment behavior is by no means one-dimensional. The heightened level of emotional arousal after downswings reduces financial risk taking and thus the money put at stake, while the exposure to financial risks itself has a positive impact on subsequent emotional arousal. Our results inspire for future research and unifying theories where utility could also stem from (anticipated) emotions.