The Psychophysiology of Real-Time Financial Risk Processing

Lo, Andrew W.; Repin, Dmitry V.

doi:10.1162/089892902317361877

Cited by 326 publications

(120 citation statements)

References 31 publications

(28 reference statements)

Supporting

Mentioning

101

Contrasting

Unclassified

Order By: Relevance

“…For example, a field study of 10 traders showed a significant relationship between volatility and skin conductance and heart rate (Lo & Repin, 2002); another study of real-time changes in traders hormones showed increases in market 9 volatility to predict increases in levels of cortisol; a hormone related to fear response (Coates & Herbert, 2008). We would thus expect that traders will face greater difficulty in regulating emotions during periods of high market volatility.…”

Section: H1: Moment By Moment Regulation Of Emotions During Trading Amentioning

confidence: 99%

“…Seo and Barrett (2007) found investment club members who regulated emotions more effectively (as measured by greater discrimination between discrete emotions) to perform more effectively in a trading simulation. In a physiological study of 10 traders, Lo and Repin found evidence of emotion-related physiological reactions to trading events but less intense reactions among more experienced than less experienced traders (Lo & Repin, 2002). However, much emotion regulation is inaccessible to self-report.…”

Section: The Role Of Emotion Regulationmentioning

confidence: 99%

See 1 more Smart Citation

Emotion regulation and trader expertise: Heart rate variability on the trading floor.

Fenton-O’Creevy¹,

Lins²,

Vohra³

et al. 2012

Journal of Neuroscience, Psychology, and Economics

View full text Add to dashboard Cite

We describe a psychophysiological study of the emotion regulation of investment bank traders. Building on work on the role of emotions in financial decision making, we examined the relationship between market conditions, trader experience, and emotion regulation while trading, as indexed by high-frequency heart rate variability (HF HRV). We found a significant inverse relationship between HF HRV and market volatility and a positive relationship between HF HRV and trader experience. We argue that this suggests that emotion regulation may be an important facet of trader expertise, and that learning effects demonstrated in financial markets may include improved emotion regulation as an important component of that learning. Our results also suggest the value of investigating the role of effective emotion regulation in a broader range of financial decision-making contexts.

show abstract

Section: H1: Moment By Moment Regulation Of Emotions During Trading Amentioning

confidence: 99%

Section: The Role Of Emotion Regulationmentioning

confidence: 99%

Emotion regulation and trader expertise: Heart rate variability on the trading floor.

Fenton-O’Creevy¹,

Lins²,

Vohra³

et al. 2012

Journal of Neuroscience, Psychology, and Economics

View full text Add to dashboard Cite

show abstract

“…However, direct risk prediction has been shown to be reflected in the bodily states of professional financial traders (Lo and Repin, 2002). In addition, recent behavioral evidence shows that human subjects adjust their learning rate to changing risk, implying that they must somehow be tracking risk (Behrens et al, 2007;Preuschoff and Bossaerts, 2007).…”

Section: Introductionmentioning

confidence: 99%

Human Insula Activation Reflects Risk Prediction Errors As Well As Risk

Preuschoff¹,

Quartz²,

Bossaerts³

2008

J. Neurosci.

701

616

View full text Add to dashboard Cite

Understanding how organisms deal with probabilistic stimulus-reward associations has been advanced by a convergence between reinforcement learning models and primate physiology, which demonstrated that the brain encodes a reward prediction error signal. However, organisms must also predict the level of risk associated with reward forecasts, monitor the errors in those risk predictions, and update these in light of new information. Risk prediction serves a dual purpose: (1) to guide choice in risk-sensitive organisms and (2) to modulate learning of uncertain rewards. To date, it is not known whether or how the brain accomplishes risk prediction. Using functional imaging during a simple gambling task in which we constantly changed risk, we show that an early-onset activation in the human insula correlates significantly with risk prediction error and that its time course is consistent with a role in rapid updating. Additionally, we show that activation previously associated with general uncertainty emerges with a delay consistent with a role in risk prediction. The activations correlating with risk prediction and risk prediction errors are the analogy for risk of activations correlating with reward prediction and reward prediction errors for reward expectation. As such, our findings indicate that our understanding of the neural basis of reward anticipation under uncertainty needs to be expanded to include risk prediction.

show abstract

“…We therefore decided to conduct the study on a real trading floor rather than under laboratory conditions and to sample steroids while traders did their normal jobs (9). With permission from the managers of a midsized trading floor (Ϸ260 traders, of which 4 were female) in the City of London, we recruited 17 male traders to participate in the study.…”

mentioning

confidence: 99%

Endogenous steroids and financial risk taking on a London trading floor

Coates

Herbert

2008

Proc. Natl. Acad. Sci. U.S.A.

574

351

View full text Add to dashboard Cite

Little is known about the role of the endocrine system in financial risk taking. Here, we report the findings of a study in which we sampled, under real working conditions, endogenous steroids from a group of male traders in the City of London. We found that a trader's morning testosterone level predicts his day's profitability. We also found that a trader's cortisol rises with both the variance of his trading results and the volatility of the market. Our results suggest that higher testosterone may contribute to economic return, whereas cortisol is increased by risk. Our results point to a further possibility: testosterone and cortisol are known to have cognitive and behavioral effects, so if the acutely elevated steroids we observed were to persist or increase as volatility rises, they may shift risk preferences and even affect a trader's ability to engage in rational choice.cortisol ͉ testosterone ͉ reward ͉ uncertainty ͉ neuroeconomics T estosterone, produced by the Leydig cells of the testes and in smaller amounts by the adrenal cortex, mediates sexual behavior and competitive encounters. It rises, for example, in athletes preparing for a competition and rises even further in the winning athlete, while falling in the losing one (1, 2). This androgenic priming of the winner can increase confidence and risk taking and improve chances of winning yet again, leading to a positive-feedback loop termed the ''winner effect'' (3, 4). Cortisol, produced by the adrenal cortex, plays a central role in the physiological and behavioral response to a physical challenge or psychological stressor. Cortisol is particularly sensitive to situations of uncontrollability, novelty, and uncertainty (5). Its wide-ranging effects include dampening the immune system; stimulating glucose metabolism; and altering mood, memory, and behavioral response to threatening circumstances (6-8). Because testosterone has been found to play a role in winning and losing, and cortisol has been found to play a role in responding to stress and uncertainty, we developed the hypothesis that these steroids would respond to financial risk taking. Specifically, we predicted that testosterone would rise on days when traders made an above-average gain in the markets, and cortisol would rise on days when traders were stressed by an above-average loss. Our data confirmed the first prediction but suggested that cortisol responds more to uncertainty of return than to loss.In designing our protocol, we assumed that traders would experience a large endocrine reaction only if the risks they were taking and the consequent profit and loss were large enough to matter to them; if, that is, the trading would meaningfully affect their income, reputation, or, in the worst case, chances of being fired. We therefore decided to conduct the study on a real trading floor rather than under laboratory conditions and to sample steroids while traders did their normal jobs (9). With permission from the managers of a midsized trading floor (Ϸ260 traders, of which 4 were female) in t...

show abstract

The Psychophysiology of Real-Time Financial Risk Processing

Cited by 326 publications

References 31 publications

Emotion regulation and trader expertise: Heart rate variability on the trading floor.

Emotion regulation and trader expertise: Heart rate variability on the trading floor.

Human Insula Activation Reflects Risk Prediction Errors As Well As Risk

Endogenous steroids and financial risk taking on a London trading floor

Contact Info

Product

Resources

About