Featured Research

from universities, journals, and other organizations

'Thinking Like A Trader' May Diminish Emotional Reaction And Aversion To Loss

Date:
March 16, 2009
Source:
New York University
Summary:
Taking the perspective of a professional trader may alter the emotional reaction to losing money and result in different choices.

The late 1990s saw the rise not only of the NASDAQ, the Dow, and the S & P 500, but also of amateur traders—individuals not formally trained to work in the unpredictable world of the stock market—to complement seasoned professionals.

Related Articles


Beyond the differences in their credentials, a study led by researchers at the California Institute of Technology (Caltech) and New York University suggests that taking the perspective of a professional trader may alter the emotional reaction to losing money and result in different choices.

The work examined correlations between loss-averse behavior and physiological arousal while subjects were asked to either focus on individual choices or take a portfolio perspective ("think like a trader"), which was hypothesized to reduce the emotional reaction to potential losses. The researchers combined methods from psychological and economic research, providing a detailed picture of how people make choices and how their perspective changes the mechanisms of decision-making.

Specifically, they asked subjects to complete a series of 140 choices between a risky gamble and a guaranteed amount of return. Subjects completed two sets of choices—one set using a strategy emphasizing each choice in isolation and one set using a strategy emphasizing each choice as one of many. Choices in isolation are analogous to those an amateur trader might make; choices made as one of many are akin to decisions a professional trader would implement because they simulate management of a diversified portfolio.

When making choices in isolation many of the subjects were loss averse. That is, they were more concerned about avoiding financial losses than in making financial gains. However, when subjects were asked to make choices using a strategy that emphasized these choices' larger context as one of many decisions—such as the decisions one would make in managing a portfolio of investments—the vast majority of participants were less loss averse.

In an effort to examine emotional factors that may coincide with the behavioral expression of loss aversion, the researchers measured changes in subjects' skin conductance due to increased sweating in response to learning the outcomes of their decisions. The results for choices made in isolation showed that subjects sweat significantly more, per dollar, to losses than gains. This "over-arousal" to losses was correlated with behavioral loss aversion, which suggests a specific role for emotions in choice. However, when subjects made decisions using the "portfolio" strategy mentioned above, the over-arousal effect disappeared—average levels of sweating per dollar were about the same for gains and losses.

The findings could be relevant to drawing distinctions between amateur and professional traders because the professionals are trafficking in portfolios and amateurs are not. Specifically, the findings support the conclusion that professionals have learned not just facts about investments, but also strategies for limiting the normal emotional response that might prevent amateurs from making the same decisions given the same information.

The research was conducted in the laboratory of NYU's Elizabeth Phelps, one of the study's co-authors.

"These results highlight how a simple shift in perspective can influence both the emotional reaction to a financial decision, and the decision itself," commented Phelps, who is professor of psychology and neural science at NYU.

Peter Sokol-Hessner, the study's lead author, added, "Though on average we may dislike losses more than we like gains, both in our behavior and in our physiological responses to them, it seems we have the power to change that."

Sokol-Hessner is a doctoral candidate in NYU's Graduate School of Arts and Science (GSAS).

Co-author Colin Camerer, a Cal Tech professor of economics, added, "The role that emotions play in economic choices is not well understood. Showing that emotional reactions can be turned on 'mute' shows both that those emotions are genuine and that they can be controlled, which gives a fresh perspective on the role emotional control may play in the economy."

These findings appear the week of March 16 in the Proceedings of the National Academy of Sciences (PNAS). The study's other co-authors included: NYU doctoral candidate Nina Curley; Ming Hsu, an assistant professor of economics at the University of Illinois at Urbana-Champaign; and Mauricio Delgado, an assistant professor at Rutgers University in Newark, N.J.


Story Source:

The above story is based on materials provided by New York University. Note: Materials may be edited for content and length.


Cite This Page:

New York University. "'Thinking Like A Trader' May Diminish Emotional Reaction And Aversion To Loss." ScienceDaily. ScienceDaily, 16 March 2009. <www.sciencedaily.com/releases/2009/03/090316173216.htm>.
New York University. (2009, March 16). 'Thinking Like A Trader' May Diminish Emotional Reaction And Aversion To Loss. ScienceDaily. Retrieved October 25, 2014 from www.sciencedaily.com/releases/2009/03/090316173216.htm
New York University. "'Thinking Like A Trader' May Diminish Emotional Reaction And Aversion To Loss." ScienceDaily. www.sciencedaily.com/releases/2009/03/090316173216.htm (accessed October 25, 2014).

Share This



More Mind & Brain News

Saturday, October 25, 2014

Featured Research

from universities, journals, and other organizations


Featured Videos

from AP, Reuters, AFP, and other news services

Academic Scandal Shocks UNC

Academic Scandal Shocks UNC

AP (Oct. 23, 2014) A scandal involving bogus classes and inflated grades at the University of North Carolina was bigger than previously reported, a new investigation found. (Oct. 23) Video provided by AP
Powered by NewsLook.com
Working Mother Getaway: Beaches Turks & Caicos

Working Mother Getaway: Beaches Turks & Caicos

Working Mother (Oct. 22, 2014) Feast your eyes on this gorgeous family-friendly resort. Video provided by Working Mother
Powered by NewsLook.com
What Your Favorite Color Says About You

What Your Favorite Color Says About You

Buzz60 (Oct. 22, 2014) We all have one color we love to wear, and believe it or not, your color preference may reveal some of your character traits. In celebration of National Color Day, Krystin Goodwin (@kyrstingoodwin) highlights what your favorite colors may say about you. Video provided by Buzz60
Powered by NewsLook.com
First-Of-Its-Kind Treatment Gives Man Ability To Walk Again

First-Of-Its-Kind Treatment Gives Man Ability To Walk Again

Newsy (Oct. 21, 2014) A medical team has for the first time given a man the ability to walk again after transplanting cells from his brain onto his severed spinal cord. Video provided by Newsy
Powered by NewsLook.com

Search ScienceDaily

Number of stories in archives: 140,361

Find with keyword(s):
Enter a keyword or phrase to search ScienceDaily for related topics and research stories.

Save/Print:
Share:

Breaking News:

Strange & Offbeat Stories


Health & Medicine

Mind & Brain

Living & Well

In Other News

... from NewsDaily.com

Science News

Health News

Environment News

Technology News



Save/Print:
Share:

Free Subscriptions


Get the latest science news with ScienceDaily's free email newsletters, updated daily and weekly. Or view hourly updated newsfeeds in your RSS reader:

Get Social & Mobile


Keep up to date with the latest news from ScienceDaily via social networks and mobile apps:

Have Feedback?


Tell us what you think of ScienceDaily -- we welcome both positive and negative comments. Have any problems using the site? Questions?
Mobile: iPhone Android Web
Follow: Facebook Twitter Google+
Subscribe: RSS Feeds Email Newsletters
Latest Headlines Health & Medicine Mind & Brain Space & Time Matter & Energy Computers & Math Plants & Animals Earth & Climate Fossils & Ruins