Incidental Affective State and Financial Risk: Beyond a Valence-Based Approach

Standard economic models explain decision-making under risk as a methodical utility maximization process. Developments in cognitive psychology and neuroeconomics show the volatility of such conceptualization highlighting human bounded rationality and discussing the role of decision makers' affective state in cognitive evaluations of risk ("risk as feelings"). Affective influences may be elicited by the decision process itself (integral affect) or might be associated with stimuli/events unrelated to the decision to be made (incidental affect). This paper reviews recent psychological and neuroscience literature on the role of incidental affect on risky choice, especially focusing on the personal finance domain. Evidence indicates that affective reactions carry over significant information about the goodness of certain choice options, especially under uncertainty conditions, directly influencing risk perception and risk taking behaviour ("affect as information"). The current paper discusses two lines of research: "mood maintenance" - "mood repair theories" and "Different Affect" - "Different Effect ("Dade") model". The first explains how the current affective valence (positive or negative) determines the psychological burden attributed to a risky option. The second suggests that affective states which share the same valence should target different motivational goals and could have opposite influences on risk taking. Recent studies showed that affective states can be investigated more comprehensive considering further dimensions of emotional experience (e.g. affective arousal). We prompt that preference might be affected by the motivation to manage both levels of valence and arousal during the decision making process. Going beyond a valence-based approach might result in a more suitable understanding of affective influences on risk taking behaviour.