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

Author

Listed:
  • 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.

Suggested Citation

  • Raymundo M. Campos-Vazquez & Emilio Cuilty, 2013. "The role of emotions on risk aversion: a prospect theory experiment," Serie documentos de trabajo del Centro de Estudios Económicos 2013-05, El Colegio de México, Centro de Estudios Económicos.
  • Handle: RePEc:emx:ceedoc:2013-05
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    More about this item

    Keywords

    risk aversion; emotions; prospect theory; experiment; Mexico;
    All these keywords.

    JEL classification:

    • C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O54 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Latin America; Caribbean

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