Several studies have suggested that investors let their emotions run away with them, adding risk by trading too much. If so, has the disintermediation of trading enabled by the Internet further boosted the level of risk that individual inves-tors routinely assume?

The answer, according to York University professor Detlev Zwick: quite likely.

In his 2005 paper, Where the Action is: Internet Stock Trading as Edgework, Zwick argues that the transfer of stock trading to the computer screen from the analog world of phone calls and faxes has created new types of experiences and practices for many investors.

The screen brings a geographically dispersed and invisible market close to the participants as a virtual representation, conveying an increased sense of control and authority to the user, he says. For instance, the Map of the Market, launched several years ago by www.SmartMoney.com, shows the changing stock prices of more than 500 publicly traded companies on a single screen.

On the map, each tile represents a single company, with the size of the tile being proportional to its market capitalization — the larger the tile, the greater the value of the company. This allows the value of different companies to be assessed by simply comparing the size of their tiles. The colour of the tile reflects the change in the company’s stock price over a set time period.

This new-found virtualization of the market shifts the investing experience increasingly toward something closer to theatre. As a result, reflections about diversification, long-term wealth accumulation or risk lose some importance in this virtual setting, Zwick suggests. Instead, a sense of being able to interact quickly with a largely unpredictable market leads more traders to embrace what he refers to as “edgework,” the experiencing of risk as an end in itself.

These new technologies give the market a more familiar face that encourages investors to develop direct and active relationships. In contrast, mediation by banks and financial advisors tends to make investors feel more distant from the market. The resulting shift to the virtual world, accompanied by generally lower online trading costs, Zwick concludes, can easily lead more investors astray if they aren’t careful.

In a more recent paper, Being Emotional During Decision Making — Good or Bad? An Empirical Investigation, University of Maryland’s Myeong-Gu Seo and Lisa Feldman Barrett of Boston College examine what part emotion plays in the new world of online stock trading.

Emotion is a mental and physical expression of a perceived stimulus. Some are considered “good”; others, “bad.” However, in reality they’re neither. But they’re certainly energy hogs that can drain investors’ mental capacity quite quickly and, usually, with little benefit.

The researchers put about 100 people, drawn from various investment clubs, through a four-week online investing simulation. Just before they traded stocks each day on the basis of the latest market data, the participants reported their emotions and the intensity of their feelings. Participants were rewarded — with sums ranging from $100 to $1,000 — for making choices that yielded high returns.

With more detailed data on screen than ever before, the study found that individuals who not only experienced emotions more intensely but also could accurately interpret these feelings made better decisions. However, say the researchers, experiencing feelings and managing them appear to be independent processes. The study found that those who understood their emotional states were more likely to be able to control those emotions. As a result, they avoided bias, which led to better results.

Traders who reported strong emotional engagement during online trading tended to achieve higher returns than those who didn’t. In addition, traders who reported wide swings in three principal emotions — anger, nervousness and sadness — tended to achieve higher returns than those who didn’t.

Those findings support the view of researchers who believe that strong emotions, rather than being harmful in decision-making, are beneficial to it because they boost attention and memory. IE