IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v70y2024i6p3381-3397.html

Emotional Engagement and Trading Performance

Author

Listed:
  • Peter Bossaerts

    (Faculty of Economics, University of Cambridge, Cambridge CB3 9DD, United Kingdom)

  • Felix Fattinger

    (Institute for Finance, Banking and Insurance, Vienna University of Economics and Business, 1020 Vienna, Austria)

  • Kristian Rotaru

    (Faculty of Business and Economics, Monash University, Caulfield East, Victoria 3145, Australia; Faculty of Medicine, Nursing and Health Sciences, Monash University, Clayton, Victoria 3800, Australia)

  • Kaitong Xu

    (Centre for Brain, Mind and Markets, The University of Melbourne, Parkville, Victoria 3010, Australia)

Abstract

Emotional involvement is known to be necessary but not sufficient for good decision making in the face of uncertainty. It has been conjectured that emotional engagement in anticipation of risky outcomes constitutes “good” emotions. We introduce a new methodology to determine whether anticipatory emotional engagement is beneficial in the context of trading in financial markets. We focus on heart rate changes because they occur at a sufficiently high frequency to discern timing relative to events in the marketplace. After conservatively adjusting for multiple hypothesis testing, we find that participants whose heart rate changes anticipate their order submissions at inflated prices earn significantly more, whereas participants whose heart rate responds to their trades earn significantly less. By investigating cointegration between skin conductance response and the dynamics of individual portfolio values, we confirm the importance of emotional involvement in determining who makes or loses money.

Suggested Citation

  • Peter Bossaerts & Felix Fattinger & Kristian Rotaru & Kaitong Xu, 2024. "Emotional Engagement and Trading Performance," Management Science, INFORMS, vol. 70(6), pages 3381-3397, June.
    • Handle: RePEc:inm:ormnsc:v:70:y:2024:i:6:p:3381-3397
    DOI: 10.1287/mnsc.2023.4883
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mnsc.2023.4883
    Download Restriction: no
    File URL: https://libkey.io/10.1287/mnsc.2023.4883?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Hamelin, Nicolas & Bonelli, Marco I., 2022. "Traders’ anticipatory feelings and traders’ profitability: An exploratory study," Journal of Behavioral and Experimental Finance, Elsevier, vol. 36(C).
    2. 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.
    3. Manish Singh & Qingyang Xu & Sarah J Wang & Tinah Hong & Mohammad M Ghassemi & Andrew W Lo, 2022. "Real-time extended psychophysiological analysis of financial risk processing," PLOS ONE, Public Library of Science, vol. 17(7), pages 1-15, July.
    4. Eduardo B. Andrade & Terrance Odean & Shengle Lin, 2016. "Bubbling with Excitement: An Experiment," Review of Finance, European Finance Association, vol. 20(2), pages 447-466.
    5. Ravi Bansal & Robert Dittmar & Dana Kiku, 2009. "Cointegration and Consumption Risks in Asset Returns," The Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 1343-1375.
    6. Bossaerts, Peter, 1988. "Common nonstationary components of asset prices," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 347-364.
    7. Smith, Vernon L & Suchanek, Gerry L & Williams, Arlington W, 1988. "Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets," Econometrica, Econometric Society, vol. 56(5), pages 1119-1151, September.
    8. Bechara, Antoine & Damasio, Antonio R., 2005. "The somatic marker hypothesis: A neural theory of economic decision," Games and Economic Behavior, Elsevier, vol. 52(2), pages 336-372, August.
    9. Alla R. Kammerdiner & Panos M. Pardalos, 2010. "Analysis of Multichannel EEG Recordings Based on Generalized Phase Synchronization and Cointegrated VAR," Springer Optimization and Its Applications, in: Wanpracha Chaovalitwongse & Panos M. Pardalos & Petros Xanthopoulos (ed.), Computational Neuroscience, chapter 0, pages 317-339, Springer.
    10. Charles N. Noussair, 2017. "The Discovery of Bubbles and Crashes in Experimental Asset Markets and the Contribution of Vernon Smith to Experimental Finance," Southern Economic Journal, John Wiley & Sons, vol. 83(3), pages 644-648, January.
    11. Peter C. B. Phillips, 1998. "New Tools for Understanding Spurious Regressions," Econometrica, Econometric Society, vol. 66(6), pages 1299-1326, November.
    12. George Loewenstein, 2000. "Emotions in Economic Theory and Economic Behavior," American Economic Review, American Economic Association, vol. 90(2), pages 426-432, May.
    13. Michael Kirchler & Jurgen Huber & Thomas Stockl, 2012. "Thar She Bursts: Reducing Confusion Reduces Bubbles," American Economic Review, American Economic Association, vol. 102(2), pages 865-883, April.
    14. Darren Duxbury & Tommy Gärling & Amelie Gamble & Vian Klass, 2020. "How emotions influence behavior in financial markets: a conceptual analysis and emotion-based account of buy-sell preferences," The European Journal of Finance, Taylor & Francis Journals, vol. 26(14), pages 1417-1438, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Adriana Breaban & Charles N Noussair, 2018. "Emotional State and Market Behavior [Bubbling with excitement: en experiment]," Review of Finance, European Finance Association, vol. 22(1), pages 279-309.
    2. Brice Corgnet & Camille Cornand & Nobuyuki Hanaki, 2020. "Tail events, emotions and risk taking," Working Papers halshs-02613344, HAL.
    3. Martin G Kocher & Konstantin E Lucks & David Schindler, 2019. "Unleashing Animal Spirits: Self-Control and Overpricing in Experimental Asset Markets," The Review of Financial Studies, Society for Financial Studies, vol. 32(6), pages 2149-2178.
    4. Butler, David & Cheung, Stephen L., 2018. "Mind, Body, Bubble! Psychological and Biophysical Dimensions of Behavior in Experimental Asset Markets," IZA Discussion Papers 11563, IZA Network @ LISER.
    5. Kocher, Martin G. & Lucks, Konstantin E. & Schindler, David, 2016. "Unleashing Animal Spirits - Self-Control and Overpricing in Experimental Asset Markets," Discussion Papers in Economics 27572, University of Munich, Department of Economics.
    6. Farjam, Mike & Kirchkamp, Oliver, 2018. "Bubbles in hybrid markets: How expectations about algorithmic trading affect human trading," Journal of Economic Behavior & Organization, Elsevier, vol. 146(C), pages 248-269.
    7. Yang, Xiaolan & Wang, Jiaqi & Chen, Shu, 2024. "Impacts of CEO-employee pay disparity on investor behavior and market dynamics: Evidence from laboratory asset markets," China Economic Review, Elsevier, vol. 88(C).
    8. Breaban, A.G., 2014. "Behavior and asset markets : Individual decisions, emotions and fundamental value trajectories," Other publications TiSEM a20e6a40-f15e-4331-83cb-c, Tilburg University, School of Economics and Management.
    9. Hamelin, Nicolas & Bonelli, Marco I., 2022. "Traders’ anticipatory feelings and traders’ profitability: An exploratory study," Journal of Behavioral and Experimental Finance, Elsevier, vol. 36(C).
    10. Marco Lambrecht & Andis Sofianos & Yilong Xu, 2025. "Does Mining Fuel Bubbles? An Experimental Study on Cryptocurrency Markets," Management Science, INFORMS, vol. 71(3), pages 1865-1888, March.
    11. Lorenzo Cominelli & Gianluca Rho & Caterina Giannetti & Federico Cozzi & Alberto Greco & Graziano A. Manduzio & Philipp Chapkovski & Michalis Drouvelis & Enzo Pasquale Scilingo, 2024. "Emotions in hybrid financial markets," Discussion Papers 2024/311, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
    12. Draganac, Dragana & Lu, Kelin, 2025. "Pricing asset beyond financial fundamentals: The impact of prosocial preference and image concerns," Journal of Economic Dynamics and Control, Elsevier, vol. 170(C).
    13. Huan Xie & Jipeng Zhang, 2016. "Bubbles and experience: An experiment with a steady inflow of new traders," Southern Economic Journal, John Wiley & Sons, vol. 82(4), pages 1349-1373, April.
    14. Yochi Cohen-Charash & Charles A Scherbaum & John D Kammeyer-Mueller & Barry M Staw, 2013. "Mood and the Market: Can Press Reports of Investors' Mood Predict Stock Prices?," PLOS ONE, Public Library of Science, vol. 8(8), pages 1-15, August.
    15. Lin, Shengle & Rassenti, Stephen, 2012. "Are under- and over-reaction the same matter? Experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 84(1), pages 39-61.
    16. Taylor Jaworski & Erik O. Kimbrough, 2016. "Bubbles, Crashes, And Endogenous Uncertainty In Linked Asset And Product Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57(1), pages 155-176, February.
    17. Akiyama, Eizo & Funaki, Yukihiko & Ishikawa, Ryuichiro & Lahav, Yaron & Noussair, Charles N., 2025. "Bubbles in asset markets and the heterogeneity of beliefs," Journal of Economic Behavior & Organization, Elsevier, vol. 236(C).
    18. Domonkos F. Vamossy, 2024. "Social Media Emotions and Market Behavior," Papers 2404.03792, arXiv.org.
    19. Steven Tucker & Yilong Xu, 2024. "Motivations to speculate are the driving forces in experimental asset market bubbles," Working Papers in Economics 24/02, University of Waikato.
    20. Schoenberg, Eric J. & Haruvy, Ernan, 2012. "Relative performance information in asset markets: An experimental approach," Journal of Economic Psychology, Elsevier, vol. 33(6), pages 1143-1155.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:70:y:2024:i:6:p:3381-3397. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.