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Global Risk, Investment and Emotions

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  • RONALD BOSMAN
  • FRANS VAN WINDEN

Abstract

We investigate a novel dynamic choice problem in an experiment where emotions are measured through self-reports. The choice problem concerns the investment of an amount of money in a safe option and a risky option when there is a 'global risk' of losing all earnings, from both options, including any return from the risky option. Our key finding is that global risk can "reduce" the amount invested in the risky option. This result cannot be explained by Expected Utility or by its main contenders, Rank-Dependent Utility and Cumulative Prospect Theory. An explanation is offered by taking account of emotions, using the emotion data from the experiment and recent psychological findings. Copyright (c) The London School of Economics and Political Science 2008.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-0335.2008.00752.x
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Bibliographic Info

Article provided by London School of Economics and Political Science in its journal Economica.

Volume (Year): 77 (2010)
Issue (Month): 307 (07)
Pages: 451-471

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Handle: RePEc:bla:econom:v:77:y:2010:i:307:p:451-471

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  1. Richard H. Thaler & Eric J. Johnson, 1990. "Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice," Management Science, INFORMS, vol. 36(6), pages 643-660, June.
  2. George Loewenstein, 2000. "Emotions in Economic Theory and Economic Behavior," American Economic Review, American Economic Association, vol. 90(2), pages 426-432, May.
  3. Caplin, Andrew & Leahy, John, 1997. "Psychological Expected Utility Theory and Anticipatory Feelings," Working Papers 97-37, C.V. Starr Center for Applied Economics, New York University.
  4. Rabin, Matthew, 2000. "Risk Aversion and Expected-Utility Theory: A Calibration Theorem," Department of Economics, Working Paper Series qt731230f8, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  5. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
  6. Bohn, Henning & Deacon, Robert, 1997. "Ownership Risk, Investment, and the Use of Natural Resources," Discussion Papers dp-97-20, Resources For the Future.
  7. Cubitt, Robin P & Starmer, Chris & Sugden, Robert, 1998. "Dynamic Choice and the Common Ratio Effect: An Experimental Investigation," Economic Journal, Royal Economic Society, vol. 108(450), pages 1362-80, September.
  8. Alberto Alesina & Roberto Perotti, 1993. "Income Distribution, Political Instability, and Investment," NBER Working Papers 4486, National Bureau of Economic Research, Inc.
  9. Zeelenberg, Marcel & van Dijk, Eric, 1997. "A reverse sunk cost effect in risky decision making: Sometimes we have too much invested to gamble," Journal of Economic Psychology, Elsevier, vol. 18(6), pages 677-691, November.
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  12. George Wu, 1999. "Anxiety and Decision Making with Delayed Resolution of Uncertainty," Theory and Decision, Springer, vol. 46(2), pages 159-199, April.
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  14. Hartog, Joop & Ferrer-i-Carbonell, Ada & Jonker, Nicole, 2002. "Linking Measured Risk Aversion to Individual Characteristics," Kyklos, Wiley Blackwell, vol. 55(1), pages 3-26.
  15. Perotti, Roberto & Alesina, Alberto, 1996. "Income Distribution, Political Instability, and Investment," Scholarly Articles 4553018, Harvard University Department of Economics.
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  18. repec:fth:coluec:625 is not listed on IDEAS
  19. Machina, Mark J, 1989. "Dynamic Consistency and Non-expected Utility Models of Choice under Uncertainty," Journal of Economic Literature, American Economic Association, vol. 27(4), pages 1622-68, December.
  20. Chris Starmer, 2000. "Developments in Non-expected Utility Theory: The Hunt for a Descriptive Theory of Choice under Risk," Journal of Economic Literature, American Economic Association, vol. 38(2), pages 332-382, June.
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  22. Loomes, Graham, 1991. " Evidence of a New Violation of the Independence Axiom," Journal of Risk and Uncertainty, Springer, vol. 4(1), pages 91-108, January.
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Cited by:
  1. Beja Jr., Edsel L., 2012. "What do happy people choose: rapid economic growth or stable economy?," MPRA Paper 38851, University Library of Munich, Germany.
  2. Riedl, Arno & van Winden, Frans, 2004. "Input versus Output Taxation in an Experimental International Economy," IZA Discussion Papers 1344, Institute for the Study of Labor (IZA).
  3. Astrid Hopfensitz & Frans van Winden, 2006. "Dynamic Choice, Independence and Emotions," Tinbergen Institute Discussion Papers 06-087/1, Tinbergen Institute.
  4. Florian Baumann & Tim Friehe, 2012. "Emotions in litigation contests," Economics of Governance, Springer, vol. 13(3), pages 195-215, September.
  5. Nathalie Colombier & David Masclet & Daniel Mirza & Claude Montmarquette, 2009. "Global Security Policies Against Terrorism and the Free Riding Problem: An Experimental Approach," CIRANO Working Papers 2009s-44, CIRANO.
  6. Peter Duersch & Maros Servátka, 2007. "Risky Punishment and Reward in the Prisoner’s Dilemma," Working Papers 0451, University of Heidelberg, Department of Economics, revised Sep 2007.

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