Affective reactions influence investment decisions: evidence from a laboratory experiment with taxation

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractWe investigate the effect of taxation on gains and losses on the investment behavior of investors.Based on the insights of both economic research on the influence of taxation on investment behavior and psychological concepts dealing with the descriptive decision behavior of investors we expect investors to react to taxation of investment alternatives they face with behavioral and affective changes. By conducting a laboratory experiment with a total of 72 participants based on the experimental design of Fochmann, Kiesewetter, and Sadrieh (2012) that allows to quantify the reactions of investors to taxation on gains and loss deduction independent of their individual risk preferences and additionally measuring the affective reactions of our participants, we explore the role of affect in the relation of taxation and decision making. Hence, we are able to show that affective reactions to the taxation situations, in particular the perceived valence of these situations, influence the change in behavior of investors when confronted with taxation on gains and limited loss deduction.

An experimental approach to examine behavior and brain activity during decision-making under risk as compared to ambiguity

“…This provides further evidence that risk-taking becomes modulated by the expected value of options. Thus, we observed higher risk-taking under decision-conditions where a gain is more likely (for related evidence see Fochmann et al, 2017;Vorhold et al, 2007). In contrast, when participants realize a greater likelihood of loss in ambiguous situations, the behavior is more cautious.…”

Tax Misperception and its Effects on Decision Making – Literature Review and Behavioral Taxpayer Response Model

“…Emotions Fochmann et al (2016) show that the more pleasant and less exciting a tax treatment is perceived, the higher the amount that is riskily invested. Fochmann et al (2017) provide evidence that investors do not change their risk taking behavior as a direct consequence of changing tax rules but due to the affective perception of these different tax rules.…”

“…They determine tax effects biased by risk and loss aversion for different loss offset restrictions. Fochmann et al (2016) and Fochmann et al (2017) experimentally examine the effect of emotions on risk-taking. Fochmann et al (2016) show that the more pleasant and less exciting a tax treatment is perceived to be, the greater the risky investment.…”

“…If tax information is in conflict with their own behavioral intentions, individuals may ignore or underweight this information due to a confirmation bias (Feldman et al, 2018;Feldman & Ruffle, 2015). Emotions, too, can affect tax perception, particularly in risky investment decisions (Fochmann et al, 2016(Fochmann et al, , 2017.…”