Abstract

Although the role of irrationality in trading choices has been extensively discussed in the literature, individual incidental emotions have been neglected. We investigated emotional explanatory factors and trading choices in a sample of non-professional agents who managed a virtual financial positions pretending to be traders. Using a series of daily surveys over a five-week period as well as introductive inventory surveys, we constructed measures of core affect and emotions and correlated these with subjects’ financial choices. Our purpose is to test if the decision to buy or sell financial assets is affected by the emotional state of individuals, considering also gender clusters. A focus is on incidental emotions, detecting how positive emotions due to sexual activity may alter financial trading choices. Our findings suggest that agents incorrectly attribute their good mood to positive economic perspectives rather than positive emotions.

۱ Introduction

Rationality in individual economic and financial decision-making behaviour is a pillar of various streams of literature. Emotional state is a significant constraint on the ability of individuals to perfectly rationalize and handle the complexity of choices. We do not know if Mae West was right when she declared “sex is emotion in motion”, but sex may certainly affect people’s emotions and, consequently, their decision-making processes. Our purpose in this paper is to detect how emotions may alter financial trading choices, specifically if long/short positions can depend on sexual activity, considering also gender clusters.

The traditional financial literature assumes that individuals are rational agents maximizing the utility function, regardless of their emotional state and previous experience. The expected utility theorem assumes that individuals choose between alternatives according to the utility deriving from each alternative and to the probability that they assign to the various alternatives. Kahneman and Tversky (1979) reconsidered the role of attitudes, emotions and, in general, behavioral biases in investors’ decisions. The way in which prospects are presented (framing) influence agents’ preferences. The decisionmaking process consists of an editing stage, when prospects are coded and categorized and complex problems are broken down into simpler subproblems, and an evaluation stage, when prospects with the highest value are chosen. Because the editing can lead to different representations, the decision can change accordingly. Framing is at the basis of mental accounting, since it is the way in which a problem is subjectively interpreted.

More recently, psychology has investigated how emotions and sentiments affect decision-making, also in regard to financial choices, and the perception of risks and rewards. According to this field of literature According to this field of literature, financial decisions are dominated by emotion rather than rational calculation; therefore, sentiments have to be considered for decisionmaking process”. Damasio (1994) shows how choices can be extremely difficult for people who have lost the use of the emotional part of their brains. Thaler (1993) proves that psychological forces play a role in determining asset prices. Breitmayer and Pelster (2018) show how affect is relevant in stock pricing models and is eligible as an additional factor in asset pricing models. Forgas (1995) shows that the computations required to make investment decisions are typically complex, abstract, and involve risk, which are the attributes considered to induce people to rely more heavily on their emotions when making a choice. Emotions have also been used to explain recent financial crises (Tuckett and Taffler, 2008), and to understand traders’ decisions. Biais et al. (2005) use an experimental approach derived from Plott and Sunder (1988) to test the hypothesis that psychological variables have an influence on traders’ behaviour, showing that mis-calibration reduces and selfmonitoring enhances trading performances. The impact of psychological variables is significant for males but not for females. Lepori (2016) shows that air pollution-induced mood changes influence market returns.

In this paper we present the results of an experimental approach designed to clarify the interactions between emotional life and financial choices. More specifically, our purpose is to test if the decision to buy or sell financial assets is affected by the emotional state of individuals, doing so within a framework that describes the main factors explaining emotions. If people are more optimistic, they may be more inclined to buy. Specifically, they incorrectly attribute their good mood to positive economic perspectives rather than positive emotions.

The paper is organized as follows. In section 2 we review the literature on the relation between investor behavior and emotions. Section 3 presents the experimental design. We describe the process of participants’ selection, the data that we collected by means of questionnaires, the rules of the game and the methodology that we applied to estimate the models. In section 4 we present and discuss the results. Section 5 concludes.