Emotional state and Market Behavior

Abstract: We consider the relationship between the emotional state of traders and market prices. We create asset markets with the structure first studied by Smith, Suchanek and Williams (1988), which is known to generate price bubbles and crashes. We analyze participants' facial expressions with facereading software before and while the market is operating. We find that greater positive emotion in facial expressions before the market opens predicts higher prices and larger bubbles. Greater fear predicts lower prices and smaller bubbles. Those traders who remain the most neutral during periods of market volatility achieve the highest earnings. Loss aversion in decision making is correlated with fear, not with other emotions.