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Anticipated and Experienced Emotions in an Investment Experiment

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Author Info
Ronald Bosman () (University of Amsterdam)
Frans van Winden () (University of Amsterdam)

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Abstract

This paper experimentally investigates investment behavior. We find that global risk – i.e. risk independent of an agent’s investment decision (like political risk) – substantially decreases investment. Also effort to obtain the capital used for investment decreases investment substantially. These results are neither in line with expected utility theory nor with psychologically orientated theories of decision making under risk (e.g. prospect theory or regret theory). We discuss the economic relevance of the results and offer an explanation that takes the role of experienced emotions (measured with self-reports) and anticipated emotions into account. In addition, an (alternative) emotion-based explanation is provided for related experimental findings concerning the common ratio effect.

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Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 01-058/1.

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Date of creation: 19 Jun 2001
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Handle: RePEc:dgr:uvatin:20010058

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Related research
Keywords: investment; global risk; effort; emotions; common ratio effect;

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References listed on IDEAS
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  1. George Loewenstein, 2000. "Emotions in Economic Theory and Economic Behavior," American Economic Review, American Economic Association, vol. 90(2), pages 426-432, May. [Downloadable!] (restricted)
  2. Hey, John D & Orme, Chris, 1994. "Investigating Generalizations of Expected Utility Theory Using Experimental Data," Econometrica, Econometric Society, vol. 62(6), pages 1291-1326, November. [Downloadable!] (restricted)
  3. Loewenstein, George, 1996. "Out of Control: Visceral Influences on Behavior," Organizational Behavior and Human Decision Processes, Elsevier, vol. 65(3), pages 272-292, March. [Downloadable!] (restricted)
  4. Elster, Jon, 1996. "Rationality and the Emotions," Economic Journal, Royal Economic Society, vol. 106(438), pages 1386-97, September. [Downloadable!] (restricted)
  5. Cubitt, Robin P & Starmer, Chris & Sugden, Robert, 1998. "Dynamic Choice and the Common Ratio Effect: An Experimental Investigation," Economic Journal, Royal Economic Society, vol. 108(450), pages 1362-80, September. [Downloadable!] (restricted)
  6. Jon Elster, 1998. "Emotions and Economic Theory," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 47-74, March. [Downloadable!] (restricted)
  7. Andrew Caplin & John Leahy, 2001. "Psychological Expected Utility Theory And Anticipatory Feelings," The Quarterly Journal of Economics, MIT Press, vol. 116(1), pages 55-79, February. [Downloadable!] (restricted)
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  8. Camerer, Colin F. & Hogarth, Robin M., 1999. "The Effects of Financial Incentives in Experiments: A Review and Capital-Labor-Production Framework," Working Papers 1059, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
  9. Chris Starmer, 2000. "Developments in Non-expected Utility Theory: The Hunt for a Descriptive Theory of Choice under Risk," Journal of Economic Literature, American Economic Association, vol. 38(2), pages 332-382, June. [Downloadable!] (restricted)
  10. Alesina, Alberto & Perotti, Roberto, 1996. "Income distribution, political instability, and investment," European Economic Review, Elsevier, vol. 40(6), pages 1203-1228, June. [Downloadable!] (restricted)
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  11. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March. [Downloadable!] (restricted)
  12. Isen, Alice M. & Geva, Nehemia, 1987. "The influence of positive affect on acceptable level of risk: The person with a large canoe has a large worry," Organizational Behavior and Human Decision Processes, Elsevier, vol. 39(2), pages 145-154, April. [Downloadable!] (restricted)
  13. Wulf Albers & Robin Pope & Reinhard Selten & Bodo Vogt, 2000. "Experimental Evidence for Attractions to Chance," German Economic Review, Blackwell Publishing, vol. 1(2), pages 113-130, 05. [Downloadable!] (restricted)
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  14. Camerer, Colin F & Hogarth, Robin M, 1999. "The Effects of Financial Incentives in Experiments: A Review and Capital-Labor-Production Framework," Journal of Risk and Uncertainty, Springer, vol. 19(1-3), pages 7-42, December. [Downloadable!] (restricted)
  15. Harless, David W & Camerer, Colin F, 1994. "The Predictive Utility of Generalized Expected Utility Theories," Econometrica, Econometric Society, vol. 62(6), pages 1251-89, November. [Downloadable!] (restricted)
  16. Zeelenberg, Marcel & Beattie, Jane & van der Pligt, Joop & de Vries, Nanne K., 1996. "Consequences of Regret Aversion: Effects of Expected Feedback on Risky Decision Making," Organizational Behavior and Human Decision Processes, Elsevier, vol. 65(2), pages 148-158, February. [Downloadable!] (restricted)
  17. Henning Bohn & Robert T. Deacon, 2000. "Ownership Risk, Investment, and the Use of Natural Resources," American Economic Review, American Economic Association, vol. 90(3), pages 526-549, June. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Pavlo Blavatskyy, 2006. "Axiomatization of a Preference for Most Probable Winner," Theory and Decision, Springer, vol. 60(1), pages 17-33, 02. [Downloadable!] (restricted)
  2. Bruno S. Frey, . "Knight Fever towards an Economics of Awards," IEW - Working Papers iewwp239, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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