Workshop on Rationality and Emotions: Notes from Day 1

JANUARY 9, 2008

Today I attended the first day of a two-day workshop (programme) on Rationality and Emotions organized by Miriam Teschl at Robinson College here at Cambridge. The mix of economics, psychology and neuroscience has so far been fascinating and below I include some general ‘impressionistic’ notes from some of the sessions so far.

Stress and Euphoria on a Trading Floor by John Coates


  • Better title might have been ‘Fear and Greed’.
  • Managed a trading desk on Wall Street.
  • Are fear and greed exaggerated by a steroid induced shift in risk preferences?
  • Cortisol rises in a market crash, raises risk aversion and accentuates crash.
  • Little literature on hormones
    • one paper on oxycytocin and trust
  • Steroids have very widespread effects in body (everything from body shape to cognitive function).
  • Cortisol follows adrenalin as a stress response.
    • Acute exposure: euphorogenic, increases motivation (+ve basically)
    • Chronic exposure: bad. Selective attention to negative precedents (Erikson 2003) etc.
      • Decrease risk preferences
  • Traders
    • 17 males, 19-38 from City Trading Floor. Healthy and no outside source of stress.
    • No overnight positions, no salary, no bonus. Just given capital and trade (each with own deal: basically a percentage or profits)
    • Annual P&L range: -10k to +5m
    • Experiment was live because you could not replicate high stakes trading in the lab.
    • Trading US Bond Futures adn Bund Future, Dax, and Euro/$
    • German market main component of P+L so that was the focus
    • Use calendar of econ stat announcements as ‘stress’ events (some traders make almost all their money just when US employment info comes out)
  • Data:
    • Sampled 2x a day (11am,, 4pm) to bracket NY 0830 news releases
    • P+L at 11am and 4pm
    • Long term P+L
    • Plus other info


  • Massive volatility in cortisol: cortisol should drop by 30% in a normal subjects but in 40% of subjects upwards slopes were increasing by 500%
  • No relation of cortisol to P+L at all (surprising: but this was not a a very volatile period).
  • But a strong relation of cortisol and std dev of P+L
  • Next look at effect of expected volatility (measured by implied volatility measures used to price derivatives) to see whether this affects cortisol release
    • incredibly good fit (people were excited because volatility means there is money to be made)
  • Conclusion: only saw acute exposure effects (so mainly excitement)
    • prolonged exposure could be very different: ‘irrational pessimism’ (but no evidence in this paper)

The Psychology of Gambling Behaviour by Dr Luke Clark


  • Lots of Gambling and it has been increasing (9.6bn a year)
  • Structural characteristics lead to overestimation chances of winning
    • Erroneous verbalizations using ‘think aloud’ (Gaboury and Ladouceur 1988) – up to 80% of their thoughts are irrational (problem gamblers show more)
    • Gamblers develop ‘illusion of control’ (Langer 1975)
    • Failure appreciate independence of turns (Wagenaar)
  • Investigate particular items
    • Effect of ‘near-misses’: people play more when more near-misses (Kassinove and Scharre 2001 find maximum at 30% of near-misses)
    • Effect of personal control:
      • craps: people bet more on their own throw than on others’ throws
      • roulette: higher bets when palyer versus croupier throws ball
      • lottery: players demand more to exchange self-selected tickets ($9) than lucky dip tickets ($2) (Langer 1975)
  • Experimental design like a slot/fruit machine (but with participant having chance to select value on left ‘wheel’)
    • Thus can investigate both control and near-misses at same time
    • Also elicit feeling at particular points of time


  • Behaviour
    • control results in significant increase in ‘happiness with situation’
    • happier when they win if ‘in control’
    • interaction of control and near-miss: when in control near-miss increases desire to continue (but this is not so when computer ‘in control’)
  • Arousal:
    • near-miss impact on arousal depends on control (w/o control no response)
  • fMRI
    • participants who show more erroneous beliefs in questionnaire show more activity in response to near-misses


  • Gambling-related cognitive distortions can be elicited on a laboratory task
  • Personal control increased perceived chance of winning and pleasure at winning
  • Near-misses are aversive but encourage continued play (*when player ‘in control’)

Time and Emotions by Stephane Luchini


  • People prefer to ‘consume’ something unpleasant before something ‘pleasant’ (if they have a choice)
    • seems problematic as with discounting would expect the opposite
  • One explanation: people ‘consume’ an event both at the time it happens and before (thus want the good thing second so you ‘anticipate’ it for longer).
  • But what about the effect of the anticipated outcome on the subjective experience of time
    • Significant amount of evidence that emotions affect time perception
  • Emotions are generated by differential/passage between two situations (not time dependent)
  • Anticipated duration is function of actual clock time and the basic emotion which depends on difference between current state and future state.


  • To obtain time reversal (negative time preference) emotions must have strong impact on time discounting
  • Only can occur if the the future date is not too remote.