Fear and Greed in Financial Markets: A Clinical Study of Day-Traders

28 Pages Posted: 15 Apr 2005  

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

Brett N. Steenbarger

SUNY Upstate Medical University - Department of Psychiatry and Behavioral Sciences

Multiple version iconThere are 2 versions of this paper

Date Written: March 2005

Abstract

We investigate several possible links between psychological factors and trading performance in a sample of 80 anonymous day-traders. Using daily emotional-state surveys over a five-week period as well as personality inventory surveys, we construct measures of personality traits and emotional states for each subject and correlate these measures with daily normalized profits-and-losses records. We find that subjects whose emotional reaction to monetary gains and losses was more intense on both the positive and negative side exhibited significantly worse trading performance. Psychological traits derived from a standardized personality inventory survey do not reveal any specific "trader personality profile", raising the possibility that trading skills may not necessarily be innate, and that different personality types may be able to perform trading functions equally well after proper instruction and practice.

Keywords: Behaviorial Finance, Market Psychology, Market Efficiency

JEL Classification: G12

Suggested Citation

Lo, Andrew W. and Repin, Dmitry V. and Steenbarger, Brett N., Fear and Greed in Financial Markets: A Clinical Study of Day-Traders (March 2005). MIT Sloan Working Paper No. 4534-05. Available at SSRN: https://ssrn.com/abstract=690501 or http://dx.doi.org/10.2139/ssrn.690501

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

Brett N. Steenbarger

SUNY Upstate Medical University - Department of Psychiatry and Behavioral Sciences ( email )

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Syracuse, NY 13210
United States

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