NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Psychophysiology of Real-Time Financial Risk Processing

Andrew W. Lo, Dmitry V. Repin

NBER Working Paper No. 8508*
Issued in October 2001
NBER Program(s):   AP

An NBER digest for this paper is available.

A longstanding controversy in economics and finance is whether financial markets are governed by rational forces or by emotional responses. We study the importance of emotion in the decisionmaking process of professional securities traders by measuring their physiological characteristics, e.g., skin conductance, blood volume pulse, etc., during live trading sessions while simultaneously capturing real-time prices from which market events can be defined. In a sample of 10 traders, we find significant correlation between electrodermal responses and transient market events, and between changes in cardiovascular variables and market volatility. We also observe differences in these correlations among the 10 traders which may be systematically related to the traders' levels of experience.

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