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

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

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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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/000282805774670095
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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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  1. Mark Kamstra & Lisa Kramer & Maurice Levi, 2002. "Winter blues: a SAD stock market cycle," Working Paper 2002-13, Federal Reserve Bank of Atlanta.
  2. 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.
  3. David Hirshleifer & TYLER G. SHUMWAY, 2004. "Good Day Sunshine: Stock Returns and the Weather," Finance 0412004, EconWPA.
  4. 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.
  5. Colin Camerer & George Loewenstein & Drazen Prelec, 2003. "Neuroeconomics: How neuroscience can inform economics," Levine's Bibliography 506439000000000484, UCLA Department of Economics.
  6. George Loewenstein, 2000. "Emotions in Economic Theory and Economic Behavior," American Economic Review, American Economic Association, vol. 90(2), pages 426-432, May.
  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. Jon Elster, 1998. "Emotions and Economic Theory," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 47-74, March.
  9. Anna Krivelyova & Cesare Robotti, 2003. "Playing the field: Geomagnetic storms and international stock markets," Working Paper 2003-5, Federal Reserve Bank of Atlanta.
  10. 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.
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