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Investment, Resolution of Risk, and the Role of Affect

  • Hopfensitz, Astrid
  • Krawczyk, Michal
  • Van Winden, Frans

This experimental study is concerned with the impact of the timing of the resolution of risk on investment behavior, with a special focus on the role of affect. In a between-subjects design we observe the impact of a substantial delay of risk resolution (2 days) on investment choices. Besides the resolution timing all other factors, including the timing of payout, are held constant across treatments. In addition, state-of-the-art experimental techniques from experimental economics and psychology are used for eliciting preferences and to explicitly measure emotions and personality traits. Participants put their own money at stake. Our main finding is that the timing of the resolution of risk matters for investment, modulated by the probability of investment success. Emotions are found to play a significant role in this respect and explain our main finding. Our results support recent models of decision making under risk trying to incorporate anticipatory emotions but also uncover some important shortcomings related to the dynamics of emotions.

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Paper provided by Toulouse School of Economics (TSE) in its series TSE Working Papers with number 09-123.

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Date of creation: Nov 2009
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Handle: RePEc:tse:wpaper:22246
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