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Global Risk, Investment, and Emotions

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Author Info
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 classical Expected Utility or by its main contenders Rank-Dependent Utility and Cumulative Prospect Theory. Anexplanation 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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Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 112.

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Date of creation: Sep 2006
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Handle: RePEc:dnb:dnbwpp:112

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Related research
Keywords: investment; global risk; real effort; emotions; dynamic choice.;

Find related papers by JEL classification:
A12 - General Economics and Teaching - - General Economics - - - Relation of Economics to Other Disciplines
C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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  1. Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
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  4. Matthew Rabin., 2000. "Risk Aversion and Expected-Utility Theory: A Calibration Theorem," Economics Working Papers E00-279, University of California at Berkeley. [Downloadable!]
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    Other versions:
  9. Cubitt, Robin P & Sugden, Robert, 2001. " Dynamic Decision-Making under Uncertainty: An Experimental Investigation of Choices between Accumulator Gambles," Journal of Risk and Uncertainty, Springer, vol. 22(2), pages 103-28, March. [Downloadable!] (restricted)
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  12. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March. [Downloadable!] (restricted)
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  15. 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. [Downloadable!] (restricted)
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  17. Henning Bohn & Robert T. Deacon, 2000. "Ownership Risk, Investment, and the Use of Natural Resources," American Economic Review, American Economic Association, vol. 90(3), pages 526-549, June. [Downloadable!] (restricted)
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  18. Ronald Bosman & Frans van Winden, 2002. "Emotional Hazard in a Power-to-take Experiment," Economic Journal, Royal Economic Society, vol. 112(476), pages 147-169, January. [Downloadable!] (restricted)
  19. Matthew Rabin, 2000. "Risk Aversion and Expected-Utility Theory: A Calibration Theorem," Econometrica, Econometric Society, vol. 68(5), pages 1281-1292, September.
  20. Matthew Rabin, 2000. "Risk Aversion and Expected-Utility Theory: A Calibration Theorem," Department of Economics, Working Paper Series 1034, Department of Economics, Institute for Business and Economic Research, UC Berkeley. [Downloadable!]
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