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Emotional Markets: Competitive Arousal, Overbidding and Bubbles

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  • Brice Corgnet

    (EM - EMLyon Business School, GATE - Groupe d'analyse et de théorie économique - UL2 - Université Lumière - Lyon 2 - ENS LSH - Ecole Normale Supérieure Lettres et Sciences Humaines - CNRS - Centre National de la Recherche Scientifique)

  • Camille Cornand
  • Nobuyuki Hanaki

Abstract

This paper investigates the influence of trading institutions on emotional arousal and bidding behavior through a series of behavioral and physiological experiments involving an investment task. In line with the competitive arousal hypothesis, we show that markets exacerbate the emotional arousal associated with winning bids, especially when buying the asset leads to substantial earnings. The Market treatment exhibits overbidding and bubble dynamics that are much less pronounced in the baseline treatments that use a BDM mechanism. These treatment differences disappear for investors who exhibit no base rate emotional arousal, suggesting that overbidding and bubbles might be eliminated by venting investors' excitement. Our study also suggests an alternative solution: designing trading institutions that mitigate competitive arousal.

Suggested Citation

  • Brice Corgnet & Camille Cornand & Nobuyuki Hanaki, 2024. "Emotional Markets: Competitive Arousal, Overbidding and Bubbles," Working Papers hal-04473406, HAL.
    • Handle: RePEc:hal:wpaper:hal-04473406
    Note: View the original document on HAL open archive server: https://hal.science/hal-04473406
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    More about this item

    Keywords

    competitive arousal; trading institutions; feedback; emotions and risk;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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