Abstract
We investigate 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 market institutions exacerbate the emotional arousal associated with winning bids, especially when buying an asset leads to substantial earnings. The market treatment exhibits stronger overbidding and bubble dynamics than baselines that use a Becker-DeGroot-Marschak mechanism. Treatment differences disappear for investors who exhibit no base rate emotional arousal. Our study shows that emotions are an important mechanism for understanding market outcomes and suggests designing new trading institutions to mitigate competitive arousal and subsequent overbidding in markets.