Anticipated and Experienced Emotions in an Investment Experiment

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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