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The role of emotions on risk aversion: a prospect theory experiment

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  • Raymundo M. Campos-Vazquez

    ()
    (El Colegio de Mexico)

  • Emilio Cuilty

    ()
    (El Colegio de Mexico)

Abstract

This study measures risk and loss aversion using Prospect Theory and the impact of emotions on those parameters. Our controlled experiment at two universities in Mexico City, using uncompensated students as research subjects, found results similar to those obtained by Tanaka et al. (2010). In order to study the role of emotions, we provided subjects with randomly varied information on rising deaths due to drug violence in Mexico and also on youth unemployment. In agreement with previous studies, we find that risk aversion on the gains domain decreases with age and income. We also find that loss aversion decreases with income and is less for students in public universities. With regard to emotions, risk aversion increases with sadness and loss aversion is negatively influenced by anger. On the loss domain, anger dominates sadness. On average, anger reduces loss aversion by half.

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File URL: http://cee.colmex.mx/documentos/documentos-de-trabajo/2013/dt20135.pdf
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Bibliographic Info

Paper provided by El Colegio de México, Centro de Estudios Económicos in its series Serie documentos de trabajo del Centro de Estudios Económicos with number 2013-05.

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Date of creation: Mar 2013
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Handle: RePEc:emx:ceedoc:2013-05

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Web page: http://www.colmex.mx/centros/cee/
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Keywords: risk aversion; emotions; prospect theory; experiment; Mexico;

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