When Anger Turns Into Dollars: How Emotions Push Traders Into Risky Moves
New research from emlyon Business School is shaking the way we think about market jitters. It turns out that when the market throws a big, nasty curveball — the so‑called tail event — the flare-ups of anger can actually make investors throw more cash at risky plays.
What Is a Tail Event Anyway?
These rare, high‑impact occurrences are the financial equivalent of a surprise snowstorm in summer. Most of the time, markets behave in a predictable way, but a tail event throws a wrench into that routine, leading to massive losses and a surge of uncertainty. Think of the 2008 financial crash or that sudden tech bubble burst.
The Science: Skins of the Soul
Brice Corgnet, a professor of finance at emlyon, led a two‑step experiment. First, participants answered a psychological survey and earned a modest sum. Then, they entered a repeated investment task while the researchers recorded a key physiological marker: skin conductance — basically how sweaty you get when adrenaline hits.
After the game, a quick questionnaire asked participants how they felt when facing a tail event. The results? Anger was the headline emotion, and it turned up big, especially for those who had just tasted a loss.
Results That Sound Like a Riot in the Room
- Angry, bold investors: Those who got hit by a tail loss and who felt a punch of anger were the ones jumping up their bids the most.
- Calmer, cautious investors: Traders who didn’t suffer big losses or didn’t feel that intense anger actually lowered their bids.
- Risk‑seeking intensity: The change in bidding was dramatically larger for people with strong emotions after a loss.
In plain English: falling off a cliff makes some people want to jump even higher.
What It Means for the Trading Desk
“Emotions play a critical role in making risk seekers after substantial losses, but we should be careful with stop‑loss orders. Those can upset traders and push them to take more risk elsewhere,” says Professor Corgnet.
So if you’re setting up a stop‑loss rule, remember that it might backfire, prompting your colleagues to gamble even harder. Think about giving them a story or a funny anecdote before tossing in the no‑give‑away‑losing-when-thing.
Takeaways in a Nutshell
- Tail events are big, scary, and disruptmarket stability.
- Anger spikes when those events hit, and it fuels risk‑taking.
- Stop‑loss orders can backfire by aggravating traders.
- Psychology + physiology paint a clearer picture of why we buy more after a loss.
So the next time your portfolio takes a tumble, watch for the little sparks of anger inside. It’s a powerful signal that you might be about to double down — or maybe—spin a different wheel. Stay alert, stay smart, and keep your emotions in check, or you’ll end up turning heartbreak into a risky, adrenaline‐filled investment adventure.
