The role of emotions on risk aversion: A Prospect Theory experiment

Abstract

This study measures risk and loss aversion using Prospect Theory and the impact of emotions on those parameters. Our controlled experiment at two universities in Mexico City, using uncompensated students as research subjects, found results similar to those obtained by Tanaka et al. (2010). In order to study the role of emotions, we provided subjects with randomly varied information on rising deaths due to drug violence in Mexico and also on youth unemployment. In agreement with previous studies, we find that risk aversion on the gains domain decreases with age and income. We also find that loss aversion decreases with income and is less for students in public universities. With regard to emotions, risk aversion increases with sadness and loss aversion is negatively influenced by anger. On the loss domain, anger dominates sadness. On average, anger reduces loss aversion by half.JEL: C93; D03; D12; O12; O54 Keywords: Risk Aversion; Emotions; Prospect Theory; Experiment; Mexico. Highlights:• We conducted a Prospect Theory experiment in Mexico.• The experiment randomly framed students into different emotions.• Emotions were prompted by information on the rising number of deaths due to drug violence in Mexico and on youth unemployment.• Sadness increases risk aversion over gains, and anger decreases loss aversion.• On average, anger reduces loss aversion by half.

Are virtuous people happier? Evidence from Italy

“…Similar remarks apply to the effect of happiness on risk-taking behavior, both in economic and non-economic settings, with some evidence supporting the view that a positive mood would promote a risk-taking behavior (as in the Affect Infusion Model, see Forgas, 1995) while other studies favor the view that positive mood would entail a more riskaverse behavior (as in the Mood Maintenance Hypothesis, see Isen and Patrick, 1983). Overall, the evidence is not conclusive and the size of the correlation, if any, between happiness and risk-taking behavior is found to be rather small or negligible (see, for instance, Campos and-Vazquez & Cuilty, 2014;Hu et al, 2015;Yechiam et al, 2016). Similar remarks apply to the correlation between happiness and time preferences, even though the empirical evidence is limited.…”

Risk preference dynamics around life events

“…Stress is also likely to be elevated by negative life events and has been linked to changes in risk preferences, although the evidence is mixed, with some studies finding that stress increases risk aversion (Porcelli & Delgado, 2009;Kandasamy et al, 2014;Cahlíková & Cingl, 2017), while others find it increases risk willingness (Starcke et al, 2008;Putman et al, 2010;Pabst, Schoofs, et al, 2013) or has no significant effect (Delany et al, 2014;Sokol-Hessner et al, 2016). Sadness has also been linked to both increased risk aversion (Campos-Vasquez & Cuilty, 2014) as well as increased risk willingness (Raghunathan & Pham, 1999). Raghunathan and Pham (1999) suggest that sadness may increase risk taking as people seek reward replacement.…”

A New Decision Method for Public Opinion Crisis with the Intervention of Risk Perception of the Public

“…[36][37][38]. In the field of emergency management, prospect theory has been applied to the public level [39,40] in addition to the decision-makers level [23][24][25][26] described above. Campos-Vazquez and Cuilty [39] used prospect theory to measure the impact of student emotions on the risk and loss aversion parameters when manipulated by drug violence and youth unemployment in Mexico City.…”

“…In the field of emergency management, prospect theory has been applied to the public level [39,40] in addition to the decision-makers level [23][24][25][26] described above. Campos-Vazquez and Cuilty [39] used prospect theory to measure the impact of student emotions on the risk and loss aversion parameters when manipulated by drug violence and youth unemployment in Mexico City. Wang et al [40] used prospect theory to describe the RPP on the arrival time of emergency materials in the study of optimal scheduling problem of emergency materials under emergencies.…”

“…That is, if the public observe the supply of materials at present is not as good as that in the past, then the RPP increases; otherwise, the RPP does not change. In addition, the application of prospect theory in the decision-making of the public [39,40] shows that the public usually has the behavioral characteristics of loss aversion and diminishing sensitivity. Under the background of this study, these two kinds of behavioral characteristics can be explained as follows: if the public observe that the current supply of materials is not as good as that of before, they feel "loss"; otherwise, they feel "gain".…”