Emotional Markets: Competitive Arousal, Overbidding and Bubbles
Résumé
This paper investigates the influence of trading institutions on emotional arousal and bidding behavior through a series of behavioral and physiological experiments involving an investment task. In line with the competitive arousal hypothesis, we show that markets exacerbate the emotional arousal associated with winning bids, especially when buying the asset leads to substantial earnings. The Market treatment exhibits overbidding and bubble dynamics that are much less pronounced in the baseline treatments that use a BDM mechanism. These treatment differences disappear for investors who exhibit no base rate emotional arousal, suggesting that overbidding and bubbles might be eliminated by venting investors' excitement. Our study also suggests an alternative solution: designing trading institutions that mitigate competitive arousal.
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