Fear and Greed in Financial Markets: A Clinical Study of Day-Traders

摘要

The rationality of financial markets has been one of the most hotly contested issues in the history of modern financial economics. Recent critics of the Efficient Markets Hypothesis argue that investors are generally irrational, exhibiting a number of predictable and financially ruinous biases, often attributed to psychological factors—fear, greed, and other emotional responses to price fluctuations and dramatic changes in an investor's wealth. However, recent research in the cognitive sciences and financial economics suggest an important link between rationality in decision-making and emotion (S. Grossberg and W. Gutowski, 1987; A. Damasio, 1994; Jon Elster, 1998; Lo, 1999; George Loewenstein, 2000; E. Peters and P. Slovic, 2000), implying that the two notions are not antithetical, but in fact complementary. For example, in a pilot study of 10 professional securities traders during live trading sessions, Lo and Repin (2002) present psychophysiolog- ical evidence that even the most seasoned trader exhibits significant emotional response, as measured by elevated levels of skin conductance and cardiovascular variables, during certain transient market events such as increased price volatility or intra-day breaks in trend. In a series of case studies, B. Steenbarger (2002) also presents evidence linking emotion with trading performance.