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The effect of induced mood on traders’ preferences in asset markets – experimental evidence

Yaron Lahav (Business Administration, Ben-Gurion University of the Negev, Beer-Sheva, Israel)
Shireen Meer (Berkeley Research Group, Washington, DC, USA)

Review of Behavioral Finance

ISSN: 1940-5979

Article publication date: 20 October 2020

Issue publication date: 2 March 2022

159

Abstract

Purpose

In this paper, we study the effect of induced positive and negative moods on traders' willingness to trade (pay and accept) in experimental asset markets.

Design/methodology/approach

We conduct experimental asset markets where subjects undergo a mood induction procedure prior to trade. After the subjects are induced with either negative or positive affect, they can trade an experimental asset with a known stream of dividends for a known number of periods.

Findings

We first show that both positive and negative affects are associated with larger positive deviations from fundamental values. We also show that when subjects are induced with positive mood, they bid higher prices but for fewer units of the stock. On the supply side, positive affect is associated with higher prices and quantities, and consequently in higher willingness to offer. Finally, we use our experimental data to test existing theories on mood effect. We find that negative affect is related to momentum trading, while positive affect is associated with information processing.

Originality/value

To our knowledge, this is the first work that studies the effect of mood on traders' behavior, rather than market outcomes.

Keywords

Acknowledgements

We would like to thank Monica Capra and Charles Noussair for their comments, help and support. We would also like to thank an anonymous referee for important comments that made the paper better.

Citation

Lahav, Y. and Meer, S. (2022), "The effect of induced mood on traders’ preferences in asset markets – experimental evidence", Review of Behavioral Finance, Vol. 14 No. 1, pp. 16-34. https://doi.org/10.1108/RBF-02-2020-0026

Publisher

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Emerald Publishing Limited

Copyright © 2020, Emerald Publishing Limited

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