Dynamic Choice, Independence and Emotions

Astrid Hopfensitz and Frans van Winden ()

No 1949, CESifo Working Paper Series from CESifo

Abstract: From the viewpoint of the independence axiom of expected utility theory, an interesting empirical dynamic choice problem involves the presence of a “global risk”, that is, a chance of losing everything whichever safe or risky option is chosen. In this experimental study, participants have to allocate real money between a safe and a risky project. Treatment variable is the particular decision stage at which a global risk is resolved: (i) before the investment decision; (ii) after the investment decision but before the resolution of the investment risk; (iii) after the resolution of the investment risk. The baseline treatment is without global risk. Our goal is to investigate the isolation effect and the principle of timing independence under the different timing options of the global risk. In addition, we examine the role played by anticipated and experienced emotions in the choice problem. Main findings are a violation of the isolation effect, and support for the principle of timing independence. Although behavior across the different global risk cases shows similarities, we observe clear differences in people’s affective responses. This may be responsible for the conflicting results observed in earlier experiments. Dependent on the timing of the global risk different combinations of anticipated and experienced emotions influence decision making.

Keywords: emotions; investment; global-risk; background risk; laboratory experiment; regret; anxiety (search for similar items in EconPapers)
JEL-codes: A12 C91 D81 (search for similar items in EconPapers)
Date: 2007
References: Add references at CitEc
Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Dynamic Choice, Independence and Emotions (2008)
Working Paper: Dynamic Choice, Independence, and Emotions (2007)
Working Paper: Dynamic Choice, Independence and Emotions (2006)
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