Emotional State and Market Behavior

Abstract

We consider the relationship between the emotional state of traders and market prices. We create 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, not with other emotions.

Unleashing Animal Spirits - Self-Control and Overpricing in Experimental Asset Markets

“…Various studies stress the relevance of pre-market emotional states for market outcomes (Hargreaves Heap and Zizzo, 2011;Lahav and Meer, 2012;Andrade et al, 2015;Breaban and Noussair, 2013). Lahav and Meer (2012) and Andrade et al (2015) found that positivity and excitement respectively induce more pronounced overpricing in experimental asset markets.…”

“…At the beginning of period 1, MIXLO participants report to feel borderline significantly more surprise (p = 0.103) and significantly more joy (p = 0.058). Remember that Lahav and Meer (2012) found that inducing positive mood before trading leads to higher deviations from fundamental values and thus larger levels of overpricing and that correlational studies also suggest such a relationship (Breaban and Noussair, 2013;Hargreaves Heap and Zizzo, 2011). Furthermore, at the end of the final trading period, MIXLO traders report significantly higher levels of excitement, fear and surprise than MIXHI participants (all p < 0.05).…”

“…22 Table 4 reports the results for those emotions that have previously been connected to overpricing in experimental asset markets (Andrade et al, 2015;Breaban and Noussair, 2013;Hargreaves Heap and Zizzo, 2011;Lahav and Meer, 2012). Note that we collapsed all the emotional measures on the treatment group level within each market and test for differences with Wilcoxon signed-rank tests.…”

“…In a similar study, Lahav and Meer (2012) show that inducing positive mood leads to higher deviations from fundamental values and thus larger overpricing. The role of emotions in experimental asset markets has also been evaluated using self-reported emotions on Likert scales (Hargreaves Heap and Zizzo, 2011) and face reading software (Breaban and Noussair, 2013), instead of inducing specific emotions exogenously. Results from these experiments indicate that excitement and a positive 7 Martinsson et al (2014) analyze the relationship between self-control and pro-sociality in an indirect way, but their findings are also in line with the idea that pro-social behavior requires self-control.…”

Bubbles in hybrid markets: How expectations about algorithmic trading affect human trading

“…Andrade, Odean, and Lin (2012) and Breaban and Noussair (2013) find that market bubbles increase in magnitude and amplitude when subjects are aroused or excited (induced by short videos before the SSW market). If arousal is, as in computer games, also lower in hybrid asset markets, then we should find smaller bubbles in hybrid markets than in human only markets.…”