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Global Risk, Investment and Emotions

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  • Bosman, R.A.J
  • van Winden, Frans A.A.M.

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 classical 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. We also find that people invest less if own earnings are at stake, compared to money obtained as an endowment.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5451.

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Date of creation: Jan 2006
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Handle: RePEc:cpr:ceprdp:5451

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Keywords: dynamic choice; emotions; global risk; investment; real effort;

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References

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  1. 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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Citations

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Cited by:
  1. Arno Riedl & Frans van Winden, 2003. "Input Versus Output Taxation in an Experimental International Economy," CESifo Working Paper Series 1088, CESifo Group Munich.
  2. 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.
  3. Hopfensitz, Astrid & van Winden, Frans A.A.M., 2007. "Dynamic Choice, Independence, and Emotions," CEPR Discussion Papers 6038, C.E.P.R. Discussion Papers.
  4. Florian Baumann & Tim Friehe, 2011. "Emotions in Litigation Contests," CESifo Working Paper Series 3351, CESifo Group Munich.
  5. Beja Jr., Edsel L., 2012. "What do happy people choose: rapid economic growth or stable economy?," MPRA Paper 38851, University Library of Munich, Germany.
  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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