The psychophysiology of risk processing and decision making at a regional stock exchange

A longstanding controversy in philosophy is whether decision-making is governed by reason or emotion. I study the role of physiological responses in the decision-making process within the realm of financial markets, where both the environment and decisions—trades—are measurable. In an experiment performed on a regional stock exchange, my collaborators and I record six different types of physiological signals—skin conductance/galvanic skin response (SCR/GSR), blood volume pulse (BVP), electrocardiogram (ECG), electroencephalogram (EEG), electromyogram (EMG), and temperature (Temp)—of monetarily motivated professionals making high pressure decisions. From these signals I estimate underlying physiological features, such as heart rate, changes in body temperature, and amplitude of SCR, which are proxy for affect. Simultaneously, we record real-time market information which the specialists process and which serves as the basis for their decisions, as well as recording their decisions and outcomes. In a sample of eight market-makers, I find statistically significant differences in mean skin conductance response and cardiovascular variables during transient market events relative to no-market-event control intervals. In addition, I find a strong relationship between trading decisions and physiological responses. Using regression, I demonstrate that heart rate variability can statistically significantly improve predictions of trading decisions, although not by much. Thesis Supervisor: Andrew W. Lo Title: Harris & Harris Group Professor, Sloan School of Management Thesis Supervisor: Peter Szolovits Title: Professor of Computer Science Professor of Health Sciences and Technology