Bossaerts, P; Fattinger, F; Rotaru, K; Xu, K
(INFORMS, 2020-04-27)
Extensive research in neuroscience proves that rational decision-making depends on accurate
anticipative emotions. We test this proposition in the context of financial markets. We replicate a multiperiod trading game that reliably generates bubbles, while tracking participants’ heart rate and
skin conductance. We find that participants whose heart rate changes in anticipation of trading at
inflated prices achieve higher earnings. In contrast, when such trades precede heart rate changes,
earnings decrease. Higher (lower) earnings accrue to participants whose skin conductance responds to the market value of stock (cash) holdings. Our findings demonstrate that emotions are integral to sound financial decision-making.