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

Author

Listed:
  • 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)

Abstract

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.

Suggested Citation

  • Helga Fehr & Thomas Epper & Adrian Bruhin & Renate Schubert, 2007. "Risk and Rationality: The Effect of Incidental Mood on Probability Weighting," SOI - Working Papers 0703, Socioeconomic Institute - University of Zurich.
  • Handle: RePEc:soz:wpaper:0703
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    File URL: http://www.econ.uzh.ch/static/wp_soi/wp0703.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Ilja Neustadt & Peter Zweifel, 2009. "Economic Well-Being, Social Mobility, and Preferences for Income Redistribution: Evidence from a Discrete Choice Experiment," SOI - Working Papers 0909, Socioeconomic Institute - University of Zurich, revised Jan 2010.
    2. Donja Darai & Dario Sacco & Armin Schmutzler, 2010. "Competition and innovation: an experimental investigation," Experimental Economics, Springer;Economic Science Association, vol. 13(4), pages 439-460, December.
    3. Dennis L. Gärtner, 2010. "Monopolistic screening under learning by doing," RAND Journal of Economics, RAND Corporation, vol. 41(3), pages 574-597.
    4. Johannes Schoder & Peter Zweifel, 2008. "Managed Care Konzepte und L�sungsans�tze� Ein internationaler Vergleich aus schweizerischer Sicht," SOI - Working Papers 0801, Socioeconomic Institute - University of Zurich.
    5. Drichoutis, Andreas C. & Nayga, Rodolfo M., 2013. "Eliciting risk and time preferences under induced mood states," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 45(C), pages 18-27.
    6. Nathalie Etchart-Vincent, 2009. "Probability weighting and the ‘level’ and ‘spacing’ of outcomes: An experimental study over losses," Journal of Risk and Uncertainty, Springer, vol. 39(1), pages 45-63, August.
    7. Falkinger, Josef, 2008. "Between Agora and Shopping Mall," IZA Discussion Papers 3524, Institute for the Study of Labor (IZA).
    8. Dennis Gaertner, 2007. "Why Bayes Rules: A Note on Bayesian vs. Classical Inference in Regime Switching Models," SOI - Working Papers 0719, Socioeconomic Institute - University of Zurich.
    9. Dario Sacco & Armin Schmutzler, 2008. "All-Pay Auctions with Negative Prize Externalities: Theory and Experimental Evidence," SOI - Working Papers 0806, Socioeconomic Institute - University of Zurich.
    10. Adrian Bruhin, 2008. "Stochastic Expected Utility and Prospect Theory in a Horse Race: A Finite Mixture Approach," SOI - Working Papers 0803, Socioeconomic Institute - University of Zurich.
    11. Sandra Hanslin, 2008. "The effect of trade openness on optimal government size under endogenous firm entry," SOI - Working Papers 0802, Socioeconomic Institute - University of Zurich.
    12. Tomasz Potocki, 2012. "Cumulative Prospect Theory as a model of economic rationality," Ekonomia journal, Faculty of Economic Sciences, University of Warsaw, vol. 31.
    13. Maurus Rischatsch, 2009. "Simulating WTP Values from Random-Coefficient Models," SOI - Working Papers 0912, Socioeconomic Institute - University of Zurich.
    14. Maurus Rischatsch & Maria Trottmann, 2009. "Physician dispensing and the choice between generic and brand-name drugs – Do margins affect choice?," SOI - Working Papers 0911, Socioeconomic Institute - University of Zurich.
    15. Silva, Pedro & Almeida, Liliana, 2011. "Weather and stock markets: empirical evidence from Portugal," MPRA Paper 54119, University Library of Munich, Germany.

    More about this item

    Keywords

    prospect theory; probability weighting function; risk taking behavior; incidental emotions; rationality;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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