NCPA - National Center for Policy Analysis

Emotion and Financial Traders

July 16, 2002

What role do emotions play in the decision-making of securities traders -- individuals who, by their training and inclination, are presumably among the most rational decision makers in the economy? Surprisingly, studies suggest emotions play a significant role in the thinking process.

Researchers analyzed data gathered from the autonomic nervous system responses of ten professional traders during live trading sessions. Electronic sensors attached to traders' face, hands and arms continuously monitored and recorded such physiological characteristics as skin conductance, heart rate, respiration, facial and forearm muscular activity and body temperature.

The study revealed:

  • Although the physiological responses of experienced and inexperienced traders show some interesting differences, even the most highly experienced subjects exhibit significant autonomic responses that clearly correlated with market events.
  • Such patterns strongly suggest that emotional responses are a significant factor in the real-time processing of financial risks, even among the most rational investors in the economy.
  • These findings support other studies that point to the significance of cognitive-emotional interactions and the genesis of what, for the lack of a more precise term, we call "intuition" -- a subconscious process distinct from explicit analytical processing.
  • In fact, the data suggest the most successful traders often seem to function without the ability (or need) to articulate the reasoning behind their decision making.

Such a conclusion may not be as puzzling as it seems. Emotion is apparently a significant determinant of the evolutionary fitness of financial traders. In short, since unsuccessful traders are generally "eliminated" from the population after a certain level of losses, the authors conjecture that the presence of emotion in the financial community is, in a Darwinian sense, desirable.

Source: Matt Nesvisky, "Measuring the Stress of Financial Traders," NBER Digest, March 2002; based on Andrew Lo and Dmitry Repin, "The Psychophysiology of Real-Time Financial Risk Processing," NBER Working Paper No. 8508, October 2001, National Bureau of Economic Research.

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