The Psychophysiology of Real-Time Financial Risk Processing

A longstanding controversy in economics and finance is whether financial markets are governed by rational forces or by emotional responses. We study the importance of emotion in the decision-making process of professional securities traders by measuring their physiological characteristics (e.g., ski...

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Bibliographic Details
Published in:Journal of cognitive neuroscience 2002-04, Vol.14 (3), p.323-339
Main Authors: Lo, Andrew W., Repin, Dmitry V.
Format: Article
Language:English
Subjects:
Behavioral psychophysiology
Biological and medical sciences
Blood Pressure
Cognition - physiology
Commerce
Decision making
Electromyography
Emotions
Emotions - physiology
Female
Financial executives
Fundamental and applied biological sciences. Psychology
Galvanic Skin Response
Heart Rate
Humans
Investments
Male
Miscellaneous
Models, Economic
Psychology. Psychoanalysis. Psychiatry
Psychology. Psychophysiology
Risk-Taking
Securities trading
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Summary:A longstanding controversy in economics and finance is whether financial markets are governed by rational forces or by emotional responses. We study the importance of emotion in the decision-making process of professional securities traders by measuring their physiological characteristics (e.g., skin conductance, blood volume pulse, etc.) during live trading sessions while simultaneously capturing real-time prices from which market events can be detected. In a sample of 10 traders, we find statistically significant differences in mean electrodermal responses during transient market events relative to no-event control periods, and statistically significant mean changes in cardiovascular variables during periods of heightened market volatility relative to normal-volatility control periods. We also observe significant differences in these physiological responses across the 10 traders that may be systematically related to the traders' levels of experience.
ISSN:0898-929X
1530-8898
DOI:10.1162/089892902317361877