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Risk and Rationality: The Effect of Incidental Mood on Probability Weighting

  • Helga Fehr

    ()

    (Institute of Economic Research, Swiss Federal Institute of Technology Zurich)

  • Thomas Epper

    ()

    (Institute of Economic Research, Swiss Federal Institute of Technology Zurich)

  • Adrian Bruhin

    ()

    (Socioeconomic Institute, University of Zurich)

  • Renate Schubert

    ()

    (Institute of Economic Research, Swiss Federal Institute of Technology Zurich)

When valuing risky prospects, people tend to overweight small probabilities and to underweight large probabilities. Nonlinear probability weighting has proven to be a robust empirical phenomenon and has been integrated in decision models, such as cumulative prospect theory. Based on a laboratory experiment with real monetary incentives, we show that incidental emotional states, such as preexisting good mood, have a significant effect on the shape of the probability weighting function, albeit only for women. Women in a better than normal mood tend to exhibit mood-congruent behavior, i.e. they weight probabilities of gains and losses relatively more optimistically. Men’s probability weights are not responsive to mood state. We find that the application of a mechanical decision criterion, such as the maximization of expected value, immunizes men against effects of incidental emotions. 40% of the male participants indeed report applying expected values as decision criterion. Only a negligible number of women do so.

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File URL: http://www.soi.uzh.ch/research/wp/2007/wp0703.pdf
File Function: First version, 2007
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Paper provided by Socioeconomic Institute - University of Zurich in its series SOI - Working Papers with number 0703.

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Length: 27 pages
Date of creation: Feb 2007
Date of revision:
Publication status: forthcoming in Journal of Economic Behavior and Organization
Handle: RePEc:soz:wpaper:0703
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