Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

'Thinking like a trader' may diminish emotional reaction and aversion to loss

17.03.2009
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.

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.

Their findings appear in the latest issue of the Proceedings of the National Academy of Sciences (PNAS).

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."

James Devitt | EurekAlert!
Further information:
http://www.nyu.edu

More articles from Studies and Analyses:

nachricht Do microplastics harbour additional risks by colonization with harmful bacteria?
05.04.2018 | Leibniz-Institut für Ostseeforschung Warnemünde

nachricht Rutgers-led innovation could spur faster, cheaper, nano-based manufacturing
14.02.2018 | Rutgers University

All articles from Studies and Analyses >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Spider silk key to new bone-fixing composite

University of Connecticut researchers have created a biodegradable composite made of silk fibers that can be used to repair broken load-bearing bones without the complications sometimes presented by other materials.

Repairing major load-bearing bones such as those in the leg can be a long and uncomfortable process.

Im Focus: Writing and deleting magnets with lasers

Study published in the journal ACS Applied Materials & Interfaces is the outcome of an international effort that included teams from Dresden and Berlin in Germany, and the US.

Scientists at the Helmholtz-Zentrum Dresden-Rossendorf (HZDR) together with colleagues from the Helmholtz-Zentrum Berlin (HZB) and the University of Virginia...

Im Focus: Gamma-ray flashes from plasma filaments

Novel highly efficient and brilliant gamma-ray source: Based on model calculations, physicists of the Max PIanck Institute for Nuclear Physics in Heidelberg propose a novel method for an efficient high-brilliance gamma-ray source. A giant collimated gamma-ray pulse is generated from the interaction of a dense ultra-relativistic electron beam with a thin solid conductor. Energetic gamma-rays are copiously produced as the electron beam splits into filaments while propagating across the conductor. The resulting gamma-ray energy and flux enable novel experiments in nuclear and fundamental physics.

The typical wavelength of light interacting with an object of the microcosm scales with the size of this object. For atoms, this ranges from visible light to...

Im Focus: Basel researchers succeed in cultivating cartilage from stem cells

Stable joint cartilage can be produced from adult stem cells originating from bone marrow. This is made possible by inducing specific molecular processes occurring during embryonic cartilage formation, as researchers from the University and University Hospital of Basel report in the scientific journal PNAS.

Certain mesenchymal stem/stromal cells from the bone marrow of adults are considered extremely promising for skeletal tissue regeneration. These adult stem...

Im Focus: Like a wedge in a hinge

Researchers lay groundwork to tailor drugs for new targets in cancer therapy

In the fight against cancer, scientists are developing new drugs to hit tumor cells at so far unused weak points. Such a “sore spot” is the protein complex...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

VideoLinks
Industry & Economy
Event News

Invitation to the upcoming "Current Topics in Bioinformatics: Big Data in Genomics and Medicine"

13.04.2018 | Event News

Unique scope of UV LED technologies and applications presented in Berlin: ICULTA-2018

12.04.2018 | Event News

IWOLIA: A conference bringing together German Industrie 4.0 and French Industrie du Futur

09.04.2018 | Event News

 
Latest News

Scientists re-create brain neurons to study obesity and personalize treatment

20.04.2018 | Health and Medicine

Spider silk key to new bone-fixing composite

20.04.2018 | Materials Sciences

Clear as mud: Desiccation cracks help reveal the shape of water on Mars

20.04.2018 | Earth Sciences

VideoLinks
Science & Research
Overview of more VideoLinks >>>