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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.

Suggested Citation

  • Ronald Bosman & Frans van Winden, 2006. "Global Risk, Investment, and Emotions," DNB Working Papers 112, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:112
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Beja Jr., Edsel L., 2012. "What do happy people choose: rapid economic growth or stable economy?," MPRA Paper 38851, University Library of Munich, Germany.
    2. Dürsch, Peter & Servátka, Maros, 2007. "Risky punishment and reward in the prisoner's dilemma," Papers 07-62, Sonderforschungsbreich 504.
    3. Riedl, Arno & van Winden, Frans, 2012. "Input versus output taxation in an experimental international economy," European Economic Review, Elsevier, vol. 56(2), pages 216-232.
    4. Astrid Hopfensitz & Frans Winden, 2008. "Dynamic Choice, Independence and Emotions," Theory and Decision, Springer, vol. 64(2), pages 249-300, March.
    5. Nathalie Colombier & David Masclet & Daniel Mirza & Claude Montmarquette, 2011. "Global Security Policies against Terrorism and the Free Riding Problem: An Experimental Approach," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 13(5), pages 755-790, October.
    6. Florian Baumann & Tim Friehe, 2012. "Emotions in litigation contests," Economics of Governance, Springer, vol. 13(3), pages 195-215, September.

    More about this item

    Keywords

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

    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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