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Fear and Economic Behavior

Author

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  • Andersson, Lina

    (Department of Economics, School of Business, Economics and Law, Göteborg University)

Abstract

Fear is an important factor in decision-making under risk and uncertainty. Psychology research suggests that fear influences one’s risk attitude and fear may have important consequences for decisions concerning for example investments, crime, conflicts, and politics. I model strategic interactions between players who can be in either a neutral or a fearful state of mind. A player’s state of mind determines his or her utility function. The two main assumptions are that (i) fear is triggered by an increase in the probability or cost of negative outcomes and (ii) a player in the fearful state is more risk averse. A player’s beliefs over the probability and cost of negative outcomes determine how the player transitions between the states of mind. I use psychological game theory to analyze the role of fear in three applications, a robbery game, a bank run game, and a public health intervention.

Suggested Citation

  • Andersson, Lina, 2022. "Fear and Economic Behavior," Working Papers in Economics 819, University of Gothenburg, Department of Economics.
    • Handle: RePEc:hhs:gunwpe:0819
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    References listed on IDEAS

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    More about this item

    Keywords

    emotions; fear; risk aversion; psychological game theory;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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