Article2007

RISK TAKING IN THE HEAT OF THE MOMENT: THE ROLE OF AFFECT AND PERFORMANCE

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Decision-Making and Behavioral Economics Financial Markets and Investment Strategies Financial Literacy, Pension, Retirement Analysis

Abstract

We examine the effects of human affect (pleasant or unpleasant feelings) and past outcomes (gains and losses) on risk-taking in a stock investment simulation in which 101 stock investors rated their feelings while simultaneously making investment decisions for twenty consecutive business days. We find that affect shifts individual’s risk behavior: individuals experiencing pleasant feelings engaged in risk-taking after significant gains, while individuals experiencing unpleasant feelings avoided risk-taking after significant losses. Only after accounting for the joint effects of affect and past outcomes, do we find stronger relationships between past outcomes and risk taking.

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References

1988Prospect theory: An analysis of decision under risk 1992Advances in prospect theory: Cumulative representation of uncertainty 1991Emotion And Adaptation 1991Loss Aversion in Riskless Choice: A Reference-Dependent Model 1988The Cognitive Structure of Emotions 2003Core affect and the psychological construction of emotion.2000The feeling of what happens: body and emotion in the making of consciousness 2001Risk as feelings.

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