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 Innovative genetic tests for children with developmental disorders and epilepsy
11.07.2018 | Christian-Albrechts-Universität zu Kiel

nachricht Oxygen loss in the coastal Baltic Sea is “unprecedentedly severe”
05.07.2018 | European Geosciences Union

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: First evidence on the source of extragalactic particles

For the first time ever, scientists have determined the cosmic origin of highest-energy neutrinos. A research group led by IceCube scientist Elisa Resconi, spokesperson of the Collaborative Research Center SFB1258 at the Technical University of Munich (TUM), provides an important piece of evidence that the particles detected by the IceCube neutrino telescope at the South Pole originate from a galaxy four billion light-years away from Earth.

To rule out other origins with certainty, the team led by neutrino physicist Elisa Resconi from the Technical University of Munich and multi-wavelength...

Im Focus: Magnetic vortices: Two independent magnetic skyrmion phases discovered in a single material

For the first time a team of researchers have discovered two different phases of magnetic skyrmions in a single material. Physicists of the Technical Universities of Munich and Dresden and the University of Cologne can now better study and understand the properties of these magnetic structures, which are important for both basic research and applications.

Whirlpools are an everyday experience in a bath tub: When the water is drained a circular vortex is formed. Typically, such whirls are rather stable. Similar...

Im Focus: Breaking the bond: To take part or not?

Physicists working with Roland Wester at the University of Innsbruck have investigated if and how chemical reactions can be influenced by targeted vibrational excitation of the reactants. They were able to demonstrate that excitation with a laser beam does not affect the efficiency of a chemical exchange reaction and that the excited molecular group acts only as a spectator in the reaction.

A frequently used reaction in organic chemistry is nucleophilic substitution. It plays, for example, an important role in in the synthesis of new chemical...

Im Focus: New 2D Spectroscopy Methods

Optical spectroscopy allows investigating the energy structure and dynamic properties of complex quantum systems. Researchers from the University of Würzburg present two new approaches of coherent two-dimensional spectroscopy.

"Put an excitation into the system and observe how it evolves." According to physicist Professor Tobias Brixner, this is the credo of optical spectroscopy....

Im Focus: Chemical reactions in the light of ultrashort X-ray pulses from free-electron lasers

Ultra-short, high-intensity X-ray flashes open the door to the foundations of chemical reactions. Free-electron lasers generate these kinds of pulses, but there is a catch: the pulses vary in duration and energy. An international research team has now presented a solution: Using a ring of 16 detectors and a circularly polarized laser beam, they can determine both factors with attosecond accuracy.

Free-electron lasers (FELs) generate extremely short and intense X-ray flashes. Researchers can use these flashes to resolve structures with diameters on the...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

VideoLinks
Industry & Economy
Event News

Leading experts in Diabetes, Metabolism and Biomedical Engineering discuss Precision Medicine

13.07.2018 | Event News

Conference on Laser Polishing – LaP: Fine Tuning for Surfaces

12.07.2018 | Event News

11th European Wood-based Panel Symposium 2018: Meeting point for the wood-based materials industry

03.07.2018 | Event News

 
Latest News

Leading experts in Diabetes, Metabolism and Biomedical Engineering discuss Precision Medicine

13.07.2018 | Event News

Research finds new molecular structures in boron-based nanoclusters

13.07.2018 | Materials Sciences

Algae Have Land Genes

13.07.2018 | Life Sciences

VideoLinks
Science & Research
Overview of more VideoLinks >>>