Dynamic Choice, Independence, and Emotions

Astrid Hopfensitz () and Frans A.A.M. van Winden

No 6038, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 behaviour across the different global risk cases is approximately the same, 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: anxiety; background risk; emotions; global risk; investment; laboratory experiment; regret (search for similar items in EconPapers)
JEL-codes: A12 C91 D81 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dcm, nep-exp, nep-ppm and nep-upt
Date: 2007-01
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