Abstract
Increasing financial trading performance is big business. A lingering question within academia and industry concerns whether emotions improve or degrade trading performance. In this study, 30 participants distributed hypothetical wealth between a share (a risk) and the bank (paying a small, sure, gain) within four trading games. Skin Conductance Response was measured while playing the games to measure anticipatory emotion, a covert emotion signal that impacts decision-making. Anticipatory emotion was significantly associated with trading performance but the direction of the correlation was dependent upon the share’s movement. Thus, anticipatory emotion is neither wholly “good” nor “bad” for trading; instead, the relationship is context-dependent. This is one of the first studies exploring the association between anticipatory emotion and trading behaviour using trading games within an experimentally rigorous environment. Our findings elucidate the relationship between anticipatory emotion and financial decision-making and have applications for improving trading performance in novice and expert traders.
Highlights
The key to being a successful trader is a huge business
While many academics argue that emotions degrade trading performance (Gray, 1999; Lerner and Keltner, 2001; Lo et al, 2005; Lucey and Dowling, 2005; Shiv, et al, 2005; Schunk and Betsch, 2006), there are those who contest that emotions have, instead, a positive impact (Ackert et al, 2003; Ackert and Deaves, 2010)
Given the case that anticipatory emotions are not comprehensively “good” nor “bad” for investment decisions, what can we learn about the relationship between anticipatory emotion and risk-aversion/−seeking in a range of trading environments?. This study addresses this question utilising a neuroeconomic approach to measure anticipatory emotion, via recordings of Skin conductance response (SCR), in multiple trading games with varying share patterns
Summary
Neoclassical economics has eschewed the investigation of emotions in favour of portraying decision-makers as “rational” and non-emotional. Newer developments in behavioural economics and emotional finance have mostly relied on a psycho-analytic approach to understand the effect of emotions on trading decisions. In their research into the dot.com bubble of the twenty-first century, Taffler and Tuckett (2005) pioneered the field of emotional finance by introducing Freud’s theory of Psychoanalysis and “phantasy” objects to investment behaviour. Taffler and Tuckett theorised that a range of unconscious emotions dictate investors’ decisionmaking, more than knowledge of company fundamentals or future growth potential. Continual growth in share price is associated with excitement and overconfidence in investors
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