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

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  • Andrew W. Lo
  • Dmitry V. Repin
  • Brett N. Steenbarger

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.

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 95 (2005)
Issue (Month): 2 (May)
Pages: 352-359

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Handle: RePEc:aea:aecrev:v:95:y:2005:i:2:p:352-359

Note: DOI: 10.1257/000282805774670095
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References

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  1. Anna Krivelyova & Cesare Robotti, 2003. "Playing the field: Geomagnetic storms and international stock markets," Working Paper 2003-5, Federal Reserve Bank of Atlanta.
  2. George Loewenstein, 2000. "Emotions in Economic Theory and Economic Behavior," American Economic Review, American Economic Association, vol. 90(2), pages 426-432, May.
  3. Andrew W. Lo & Dmitry V. Repin & Brett N. Steenbarger, 2005. "Fear and Greed in Financial Markets: A Clinical Study of Day-Traders," American Economic Review, American Economic Association, vol. 95(2), pages 352-359, May.
  4. Colin Camerer & George Loewenstein & Drazen Prelec, 2003. "Neuroeconomics: How neuroscience can inform economics," Levine's Bibliography 506439000000000484, UCLA Department of Economics.
  5. Jon Elster, 1998. "Emotions and Economic Theory," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 47-74, March.
  6. Mark Kamstra & Lisa Kramer & Maurice Levi, 2002. "Winter blues: a SAD stock market cycle," Working Paper 2002-13, Federal Reserve Bank of Atlanta.
  7. Mittal, Vikas & Ross, William T., 1998. "The Impact of Positive and Negative Affect and Issue Framing on Issue Interpretation and Risk Taking," Organizational Behavior and Human Decision Processes, Elsevier, vol. 76(3), pages 298-324, December.
  8. Brandstatter, Hermann & Guth, Werner, 2000. "A psychological approach to individual differences in intertemporal consumption patterns," Journal of Economic Psychology, Elsevier, vol. 21(5), pages 465-479, October.
  9. Isen, Alice M. & Geva, Nehemia, 1987. "The influence of positive affect on acceptable level of risk: The person with a large canoe has a large worry," Organizational Behavior and Human Decision Processes, Elsevier, vol. 39(2), pages 145-154, April.
  10. David Hirshleifer & TYLER G. SHUMWAY, 2004. "Good Day Sunshine: Stock Returns and the Weather," Finance 0412004, EconWPA.
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Citations

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Cited by:
  1. van Winden, Frans & Krawczyk, Michal & Hopfensitz, Astrid, 2011. "Investment, resolution of risk, and the role of affect," Journal of Economic Psychology, Elsevier, vol. 32(6), pages 918-939.
  2. Kuhnen, Camelia M., 2012. "Asymmetric learning from financial information," MPRA Paper 39412, University Library of Munich, Germany.
  3. Baddeley, M. & Burke, C. & Schultz, W. & Tobler, P., 2012. "Herding in Financial Behaviour: A Behavioural and Neuroeconomic Analysis of Individual Differences," Cambridge Working Papers in Economics 1225, Faculty of Economics, University of Cambridge.
  4. Volk, Stefan & Thoeni, Christian & Ruigrok, Winfried, 2011. "Temporal stability and psychological foundations of cooperation preferences," Economics Working Paper Series 1101, University of St. Gallen, School of Economics and Political Science.
  5. Hopfensitz, Astrid & Wranik, Tanja, 2009. "How to adapt to changing markets: experience and personality in a repeated investment game," MPRA Paper 17835, University Library of Munich, Germany.
  6. Kelly, Patrick J. & Meschke, Felix, 2010. "Sentiment and stock returns: The SAD anomaly revisited," Journal of Banking & Finance, Elsevier, vol. 34(6), pages 1308-1326, June.
  7. Locke, Peter R. & Mann, Steven C., 2009. "Daily income target effects: Evidence from a large sample of professional commodities traders," Journal of Financial Markets, Elsevier, vol. 12(4), pages 814-831, November.
  8. Friedrich Schneider & Gebhard Kirchgässner, 2009. "Financial and world economic crisis: What did economists contribute?," Public Choice, Springer, vol. 140(3), pages 319-327, September.
  9. Muehlfeld, Katrin & Weitzel, Utz & van Witteloostuijn, Arjen, 2013. "Fight or freeze? Individual differences in investors’ motivational systems and trading in experimental asset markets," Journal of Economic Psychology, Elsevier, vol. 34(C), pages 195-209.
  10. Gambetti, Elisa & Giusberti, Fiorella, 2012. "The effect of anger and anxiety traits on investment decisions," Journal of Economic Psychology, Elsevier, vol. 33(6), pages 1059-1069.
  11. Jennifer K Gippel, 2013. "A revolution in finance?," Australian Journal of Management, Australian School of Business, vol. 38(1), pages 125-146, April.
  12. Subrahmanyam, Avanidhar, 2009. "Optimal financial education," Review of Financial Economics, Elsevier, vol. 18(1), pages 1-9, January.
  13. Subrahmanyam, Avanidhar, 2008. "Learning from experience and trading volume," Review of Financial Economics, Elsevier, vol. 17(4), pages 245-260, December.
  14. Kenning, Peter & Mohr, Peter & Erk, Susanne & Walter, Henrik & Plassmann, Hilke, 2006. "The role of fear in home-biased decision making: first insights from neuroeconomics," MPRA Paper 1076, University Library of Munich, Germany, revised 18 Nov 2006.
  15. Andrew W. Lo & Dmitry V. Repin & Brett N. Steenbarger, 2005. "Fear and Greed in Financial Markets: A Clinical Study of Day-Traders," NBER Working Papers 11243, National Bureau of Economic Research, Inc.

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