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The Psychophysiology of Real-Time Financial Risk Processing

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  • Andrew W. Lo
  • Dmitry V. Repin

Abstract

A longstanding controversy in economics and finance is whether financial markets are governed by rational forces or by emotional responses. We study the importance of emotion in the decisionmaking process of professional securities traders by measuring their physiological characteristics, e.g., skin conductance, blood volume pulse, etc., during live trading sessions while simultaneously capturing real-time prices from which market events can be defined. In a sample of 10 traders, we find significant correlation between electrodermal responses and transient market events, and between changes in cardiovascular variables and market volatility. We also observe differences in these correlations among the 10 traders which may be systematically related to the traders' levels of experience.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8508.

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Date of creation: Oct 2001
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Publication status: published as Lo, Andrew W. and Dmitry V. Repin. "The Psychophysiology of Real-Time Financial Risk Processing." Journal of Cognitive Neuroscience 14, 3 (April 1, 2002): 323-339.
Handle: RePEc:nbr:nberwo:8508

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  1. De Bondt, Werner F M & Thaler, Richard, 1985. " Does the Stock Market Overreact?," Journal of Finance, American Finance Association, vol. 40(3), pages 793-805, July.
  2. Simon Gervais & Terrance Odean, . "Learning To Be Overconfident," Rodney L. White Center for Financial Research Working Papers 05-97, Wharton School Rodney L. White Center for Financial Research.
  3. Terrance Odean, 1998. "Are Investors Reluctant to Realize Their Losses?," Journal of Finance, American Finance Association, vol. 53(5), pages 1775-1798, October.
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Cited by:
  1. Melo, L, 2010. "Earth magnetism and the economic behavior," MPRA Paper 21656, University Library of Munich, Germany.
  2. Lucy F. Ackert & Bryan K. Church & Richard Deaves, 2003. "Emotion and financial markets," Economic Review, Federal Reserve Bank of Atlanta, issue Q2, pages 33-41.
  3. Dr. Peter Kenning & Hilke Plassmann, 2004. "NeuroEconomics," Experimental 0412005, EconWPA.
  4. Antonio Falato, 2008. "Happiness maintenance and asset prices," Finance and Economics Discussion Series 2008-19, Board of Governors of the Federal Reserve System (U.S.).
  5. Antonio Falato, 2003. "Happiness Maintenance and Asset Prices," Finance 0310003, EconWPA.
  6. Anna Krivelyova & Cesare Robotti, 2003. "Playing the field: Geomagnetic storms and international stock markets," Working Paper 2003-5, Federal Reserve Bank of Atlanta.

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