THE EFFECTS OF EMOTIONS ON RISK AVERSION BEHAVIOR

SSRN Electronic Journal, 2013

We consider the relationship between emotions and decision-making under risk. Specifically, we examine the emotional correlates of risk-averse decisions. In our experiment, individuals' facial expressions are monitored with facereading software, as they are presented with risky lotteries. We then correlate these facial expressions with subsequent decisions in risky choice tasks. We find that the valence of one's emotional state is negatively correlated, and the strength of a number of emotions: fear, happiness, anger, and surprise, is positively correlated, with risk-averse decisions.

Journal of Economic Psychology, 2012

ABSTRACT This study investigates the extent to which people make financial decisions on the basis of 16 their dispositional tendency to engage in a specific emotion, such as anger or anxiety. We 17 predicted that trait anger is associated with the decision to invest, whereas trait anxiety 18 motivates individuals to avoid investments. We employed a six question survey, consider- 19 ing real life investment decisions, stock trend predictability and preference toward risk 20 investments, and three hypothetic scenarios to measure the participants’ risk attitudes 21 in the area of finance. The results showed that trait anger predicted risky decisions: it 22 was positively associated with the willingness to invest money in different kinds of stocks, 23 preferring medium/long-term investments, and with high predictability assessment in the 24 forecast of stock trends. Contrarily, trait anxiety predicted conservative financial decisions: 25 it was associated with the decision not to invest savings, to hold interest-bearing accounts, 26 and with low predictability of stock trends. In hypothetic scenarios trait anger predicted a 27 medium risk portfolio and the decision to wait before selling both loss and gain invest- 28 ments, while trait anxiety was associated with the preference for a low risk portfolio 29 and with the decision to immediately sell a stock both if it increases or decreases in value. 30 These data are consistent with cognitive models of emotions, highlighting their functional 31 utility and extend the knowledge of the relationship between personality traits and real life 32 investment decision-making.

Journal of Risk Research, 2008

The purpose of this study was to determine whether support could be found for either the Affect Infusion Model or the Mood Maintenance Hypothesis regarding how mood influences financial risk tolerance. An ordinary least-squares regression model was used to determine if people who exhibited a happy mood at the time they completed a survey scored differently than those who were not happy. In a sample (n5460) of employed mid-western respondents between the ages of 18 and 75 years, being in a happy mood was positively associated with having a higher level of financial risk tolerance, holding biopsychosocial and environmental factors constant. Support for the Affect Infusion Model was obtained.

World Applied Sciences Journal

Financial theories support the efficient market hypothesis, which assumes that prices are fair in the market and investors behave rationally while taking any investment decision. Individual Investors of the stock market are therefore thought to take rational decisions while making judgments and investment decisions. However, a lot of studies on behavioral finance have criticized the phenomenon of market efficiency and investor’s rationality. The empirical evidences of these studies conclude the involvement of behavioral biases and psychological impacts on investor’s judgments and decision making. Keeping this in mind the present study has focused on studying the impact of affect heuristic, fear and anger on individual investor’s judgments and decision making. Overall discussion concludes the presence of behavioral biases in decision making process of investors. Keywords: Affect Heuristic, Fear, Anger, Investment Decision Making, Behavioral Aspects

World applied sciences journal, 2013

Financial theories support the efficient market hypothesis, which assumes that prices are fair in the market and investors behave rationally while taking any investment decision. Individual Investors of the stock market are therefore thought to take rational decisions while making judgments and investment decisions. However, a lot of studies on behavioral finance have criticized the phenomenon of market efficiency and investor's rationality. The empirical evidences of these studies conclude the involvement of behavioral biases and psychological impacts on investor's judgments and decision making. Keeping this in mind the present study has focused on studying the impact of affect heuristic, fear and anger on individual investor's judgments and decision making. Overall discussion concludes the presence of behavioral biases in decision making process of investors.

This study investigates the extent to which people make financial decisions on the basis of their dispositional tendency to engage in a specific emotion, such as anger or anxiety. We predicted that trait anger is associated with the decision to invest, whereas trait anxiety motivates individuals to avoid investments. We employed a six question survey, considering real life investment decisions, stock trend predictability and preference toward risk investments, and three hypothetic scenarios to measure the participants' risk attitudes in the area of finance. The results showed that trait anger predicted risky decisions: it was positively associated with the willingness to invest money in different kinds of stocks, preferring medium/long-term investments, and with high predictability assessment in the forecast of stock trends. Contrarily, trait anxiety predicted conservative financial decisions: it was associated with the decision not to invest savings, to hold interest-bearing accounts, and with low predictability of stock trends. In hypothetic scenarios trait anger predicted a medium risk portfolio and the decision to wait before selling both loss and gain investments, while trait anxiety was associated with the preference for a low risk portfolio and with the decision to immediately sell a stock both if it increases or decreases in value. These data are consistent with cognitive models of emotions, highlighting their functional utility and extend the knowledge of the relationship between personality traits and real life investment decision-making.

2005

Abstract: This paper investigates the influence of experienced and anticipated emotions on investment decisions. Data are obtained from an experiment where subjects have to allocate real money to a safe and a risky project, while their emotions are measured. The impact of two factors are considered:(i) the amount of money that is at stake, and (ii) the presence of a global risk, that is, a risk that cannot be avoided. Anticipated regret and rejoicing appear to be important determinants of investment, across all experimental treatments.

2003

There is some evidence indicating a relationship between variations in affect and risk aversion: under certain conditions the behavior observed suggests less risk aversion the more positive the affective state. The research presented in this paper examined how variations in everyday affective states influenced risk taking behavior in the laboratory using simple gambling tasks and then sought to corroborate findings in the laboratory using data on real world financial decision making. We observed a significant and positive relationship between affect and risky behavior in the laboratory that we replicated using structural equation modeling on real world financial data. It is argued that cognitive theories of affect and decision making might have real economic consequences.

Journal of Economic Psychology, 2011

This experimental study is concerned with the impact of the timing of the resolution of risk on people's willingness to take risks, with a special focus on the role of affect. While the importance of anticipatory emotions has so far been only inferred from decisions regarding hypothetical choice problems, we had participants put their own money at risk in a real investment task. Moreover, emotions were explicitly measured, including anticipatory emotions experienced during the waiting period under delayed resolution (which involved two days). Affective traits and risk attitudes were measured through a web-based questionnaire before the experiment and participants' preferences for resolution timing, risk, and time were incentive compatibly measured during the experiment. Main findings are that delayed resolution can affect investment, that the effect depends on the risk involved, and that (among all the measures considered) only emotions can explain our results, albeit in ways that are not captured by existing models.

Emotional finance is a new area in finance and is at an early stage of its development as a coherent discipline. It aims to provide an understanding of financial market behavior and investment processes by formally recognizing the role of unconscious needs and fears play in all investment activity. The objective of this research is to study the emotions that play in the trading and investment activity of the investors and to analyze the impact of emotions on the stock market investments. The data was collected extensively from Coimbatore district in Tamil Nadu identifying investors through share broker officers and financial institutions. The research findings are investment decisions involve emotions. The investors 'fall in the confidence' that may follow a big loss, leading to inability to make a buy or sell decisions and the investors finds inability to stick with the planned strategies due to this emotional influence. Respondent's emotions or the brain activity affects the stock market financial decisions, the respondents take bigger risk to avoid loss and they trust in instincts. It is concluded that there is association between the risk appetites of the respondents with that of the level of education of the respondents. By understanding the emotions in human behavior and psychological mechanisms involved in financial decision-making, standard finance models may be improved to better reflect and explain the reality in today's evolving markets. The ability to understand the judgment heuristics like rationality or irrationality of the investment pattern and experience along with emotional management would enable the investor to act with caution as the consequences are likely to affect the asset value, lifestyle, relationship with others and social interaction.