Bubbles Created by Trading Under the Influence of Emotion

This morning, we bring you the latest installment of your brain on stocks — our ongoing look at how your wetware constantly leads you into making really bad trading and investment decisions. Don’t blame yourself; it isn’t your fault. You were built that way.

Today’s edition looks at the impact of wholly unrelated, nonfinancial emotions on an investor’s propensity to take risks.

To do so, University of California-Berkeley professor Terrance Odean of the Haas School of Business (with Eduardo B. Andrade, professor at the Brazilian School of Public and Business Administration and Shengle Lin, assistant professor at San Francisco State University) ran an interesting experiment: They took 495 students and tried to measure how watching an exciting or a scary movie altered trading decisions.

The researchers attributed three emotional states that “varied in both intensity and whether they were positive or negative: excitement (high intensity and positive), calm (low intensity and positive), and fear (high intensity and negative)” to a specific type of film.

Continues here: Trading Under the Influence of Emotion

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