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Affective reactions influence investment decisions: Evidence from a laboratory experiment with taxation

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  • Schüßler, Katharina
  • Hewig, Johannes
  • Kiesewetter, Dirk
  • Fochmann, Martin

Abstract

We investigate the effect of taxation on gains and losses on the investment behavior of investors. Based on the insights of both economic research on the influence of taxation on investment behavior and psychological concepts dealing with the descriptive decision behavior of investors we expect investors to react to taxation of investment alternatives they face with behavioral and affective changes. By conducting a laboratory experiment with a total of 72 participants based on the experimental design of Fochmann, Kiesewetter, and Sadrieh (2012) that allows to quantify the reactions of investors to taxation on gains and loss deduction independent of their individual risk preferences and additionally measuring the affective reactions of our participants, we explore the role of affect in the relation of taxation and decision making. Hence, we are able to show that affective reactions to the taxation situations, in particular the perceived valence of these situations, influence the change in behavior of investors when confronted with taxation on gains and limited loss deduction. --

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Bibliographic Info

Paper provided by arqus - Arbeitskreis Quantitative Steuerlehre in its series arqus Discussion Papers in Quantitative Tax Research with number 160.

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Date of creation: 2014
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Handle: RePEc:zbw:arqudp:160

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Keywords: decision making; risk taking behavior; behavioral taxation; distorting taxation; affect; valence;

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  1. Fochmann, Martin & Kiesewetter, Dirk & Sadrieh, Abdolkarim, 2012. "Investment behavior and the biased perception of limited loss deduction in income taxation," Journal of Economic Behavior & Organization, Elsevier, vol. 81(1), pages 230-242.
  2. de Bartolome, Charles A. M., 1995. "Which tax rate do people use: Average or marginal?," Journal of Public Economics, Elsevier, vol. 56(1), pages 79-96, January.
  3. Feldstein, Martin S, 1969. "The Effects on Taxation on Risk Taking," Journal of Political Economy, University of Chicago Press, vol. 77(5), pages 755-64, Sept./Oct.
  4. Jaroslava Hlouskova & Panagiotis Tsigaris, 2012. "Capital income taxation and risk taking under prospect theory," International Tax and Public Finance, Springer, vol. 19(4), pages 554-573, August.
  5. Catherine C. Eckel & Philip J. Grossman, 2008. "Sex and Risk: Experimental Evidence," Development Research Unit Working Paper Series archive-09, Monash University, Department of Economics.
  6. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  7. 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.
  8. Bechara, Antoine & Damasio, Antonio R., 2005. "The somatic marker hypothesis: A neural theory of economic decision," Games and Economic Behavior, Elsevier, vol. 52(2), pages 336-372, August.
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