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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 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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File URL: http://www.dnb.nl/binaries/Working%20Paper%20No%20112-2006_tcm46-146769.pdf
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Bibliographic Info

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

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Citations

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Cited by:
  1. 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.
  2. Colombier, Nathalie & Masclet, David & Mirza, Daniel & Montmarquette, Claude, 2010. "Global Security Policies Against Terrorism and the Free Riding Problem: An Experimental Approach," CEPREMAP Working Papers (Docweb) 1012, CEPREMAP.
  3. Florian Baumann & Tim Friehe, 2011. "Emotions in Litigation Contests," CESifo Working Paper Series 3351, CESifo Group Munich.
  4. Astrid Hopfensitz & Frans Winden, 2008. "Dynamic Choice, Independence and Emotions," Theory and Decision, Springer, vol. 64(2), pages 249-300, March.
  5. 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).
  6. Beja Jr., Edsel L., 2012. "What do happy people choose: rapid economic growth or stable economy?," MPRA Paper 38851, University Library of Munich, Germany.

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