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The effect of induced mood on traders’ preferences in asset markets – experimental evidence

Author

Listed:
  • Yaron Lahav
  • Shireen Meer

Abstract

Purpose - In this paper, we study the effect of induced positive and negative moods on traders' willingness to trade (pay and accept) in experimental asset markets. Design/methodology/approach - We conduct experimental asset markets where subjects undergo a mood induction procedure prior to trade. After the subjects are induced with either negative or positive affect, they can trade an experimental asset with a known stream of dividends for a known number of periods. Findings - We first show that both positive and negative affects are associated with larger positive deviations from fundamental values. We also show that when subjects are induced with positive mood, they bid higher prices but for fewer units of the stock. On the supply side, positive affect is associated with higher prices and quantities, and consequently in higher willingness to offer. Finally, we use our experimental data to test existing theories on mood effect. We find that negative affect is related to momentum trading, while positive affect is associated with information processing. Originality/value - To our knowledge, this is the first work that studies the effect of mood on traders' behavior, rather than market outcomes.

Suggested Citation

  • Yaron Lahav & Shireen Meer, 2020. "The effect of induced mood on traders’ preferences in asset markets – experimental evidence," Review of Behavioral Finance, Emerald Group Publishing Limited, vol. 14(1), pages 16-34, October.
    • Handle: RePEc:eme:rbfpps:rbf-02-2020-0026
    DOI: 10.1108/RBF-02-2020-0026
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    Citations

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    Cited by:

    1. Goodell, John W. & Kumar, Satish & Rao, Purnima & Verma, Shubhangi, 2023. "Emotions and stock market anomalies: A systematic review," Journal of Behavioral and Experimental Finance, Elsevier, vol. 37(C).

    More about this item

    Keywords

    Behavioral finance; Experimental asset markets; Mood induction; Emotions; C92; D12; D81; G02; G11;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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