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Emotional State and Market Behavior

Author

Listed:
  • Adriana Breaban

    (LEE & Department of Economics, Universitat Jaume I, Castellón, Spain)

  • Charles N. Noussair

    (Department of Economics, Tilburg University, Tilburg, Holland)

Abstract

We consider the relationship between the emotional state of asset traders and market prices. We create experimental asset markets with the structure first studied by Smith, Suchanek and Williams (1988), which is known to generate price bubbles and crashes. We analyze participants' facial expressions with facereading software before and while the market is operating. We find that greater positive emotion in facial expressions before the market opens predicts higher prices and larger bubbles. Greater fear predicts lower prices and smaller bubbles. Those traders who remain the most neutral during periods of market volatility achieve the highest earnings. Loss aversion in decision making is correlated with fear, but not with other emotions.

Suggested Citation

  • Adriana Breaban & Charles N. Noussair, 2013. "Emotional State and Market Behavior," Working Papers 2013/08, Economics Department, Universitat Jaume I, Castellón (Spain).
    • Handle: RePEc:jau:wpaper:2013/08
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    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles

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