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Emotional Engagement and Trading Performance

Author

Listed:
  • Peter Bossaerts

    (Faculty of Economics, University of Cambridge, Cambridge CB3 9DD, United Kingdom)

  • Felix Fattinger

    (Institute for Finance, Banking and Insurance, Vienna University of Economics and Business, 1020 Vienna, Austria)

  • Kristian Rotaru

    (Faculty of Business and Economics, Monash University, Caulfield East, Victoria 3145, Australia; Faculty of Medicine, Nursing and Health Sciences, Monash University, Clayton, Victoria 3800, Australia)

  • Kaitong Xu

    (Centre for Brain, Mind and Markets, The University of Melbourne, Parkville, Victoria 3010, Australia)

Abstract

Emotional involvement is known to be necessary but not sufficient for good decision making in the face of uncertainty. It has been conjectured that emotional engagement in anticipation of risky outcomes constitutes “good” emotions. We introduce a new methodology to determine whether anticipatory emotional engagement is beneficial in the context of trading in financial markets. We focus on heart rate changes because they occur at a sufficiently high frequency to discern timing relative to events in the marketplace. After conservatively adjusting for multiple hypothesis testing, we find that participants whose heart rate changes anticipate their order submissions at inflated prices earn significantly more, whereas participants whose heart rate responds to their trades earn significantly less. By investigating cointegration between skin conductance response and the dynamics of individual portfolio values, we confirm the importance of emotional involvement in determining who makes or loses money.

Suggested Citation

  • Peter Bossaerts & Felix Fattinger & Kristian Rotaru & Kaitong Xu, 2024. "Emotional Engagement and Trading Performance," Management Science, INFORMS, vol. 70(6), pages 3381-3397, June.
    • Handle: RePEc:inm:ormnsc:v:70:y:2024:i:6:p:3381-3397
    DOI: 10.1287/mnsc.2023.4883
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