Thinking like a trader selectively reduces individuals' loss aversion

Abstract

Research on emotion regulation has focused upon observers' ability to regulate their emotional reaction to stimuli such as affective pictures, but many other aspects of our affective experience are also potentially amenable to intentional cognitive regulation. In the domain of decision-making, recent work has demonstrated a role for emotions in choice, although such work has generally remained agnostic about the specific role of emotion. Combining psychologically-derived cognitive strategies, physiological measurements of arousal, and an economic model of behavior, this study examined changes in choices (specifically, loss aversion) and physiological correlates of behavior as the result of an intentional cognitive regulation strategy. Participants were on average more aroused per dollar to losses relative to gains, as measured with skin conductance response, and the difference in arousal to losses versus gains correlated with behavioral loss aversion across subjects. These results suggest a specific role for arousal responses in loss aversion. Most importantly, the intentional cognitive regulation strategy, which emphasized ''perspective-taking,'' uniquely reduced both behavioral loss aversion and arousal to losses relative to gains, largely by influencing arousal to losses. Our results confirm previous research demonstrating loss aversion while providing new evidence characterizing individual differences and arousal correlates and illustrating the effectiveness of intentional regulation strategies in reducing loss aversion both behaviorally and physiologically.arousal ͉ emotion regulation ͉ decision-making W e are not at the whim of our emotions-rather, research on emotion regulation suggests we have a degree of control over our affective state and can reduce or enhance the emotional impact of a given stimulus in real time (1). We are able to do this intentionally, and when doing so, we not only report decreased negative affect (1-3) but also show signs of decreased physiological responding (4, 5) and decreased activity in brain areas that are closely linked to emotions and affect (1-3). Emotion regulation research so far has primarily used pictures (1-5), but any stimulus that results in an emotional response could theoretically be the target of regulation. We propose to examine a specific role for emotions in economic choice behavior and to observe the effects of an intentional cognitive regulation strategy on both behavior and associated emotional responses.It is widely acknowledged that emotion plays a role in decisionmaking, drawing on evidence from numerous behavioral studies using emotional stimuli as well as physiological, neuroimaging, and lesion studies. For example, one study demonstrated that irrelevant emotional states induced by film clips could eliminate or even reverse the endowment effect (higher selling than buying prices) in subsequent choices (6). Another study on consumption behavior of drinks showed that the subliminal presentation of emotional faces not only altered participants' ratings ...

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