Risk and Rationality: The Effect of Incidental Mood on Probability Weighting

Helga Fehr (), Thomas Epper, Adrian Bruhin () and Renate Schubert ()
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Helga Fehr: Institute of Economic Research, Swiss Federal Institute of Technology Zurich
Renate Schubert: Institute of Economic Research, Swiss Federal Institute of Technology Zurich

No 703, Working Papers from University of Zurich, Socioeconomic Institute

Abstract: When valuing risky prospects, people tend to overweight small probabilities and to underweight large probabilities. Nonlinear probability weighting has proven to be a robust empirical phenomenon and has been integrated in decision models, such as cumulative prospect theory. Based on a laboratory experiment with real monetary incentives, we show that incidental emotional states, such as preexisting good mood, have a significant effect on the shape of the probability weighting function, albeit only for women. Women in a better than normal mood tend to exhibit mood-congruent behavior, i.e. they weight probabilities of gains and losses relatively more optimistically. Men’s probability weights are not responsive to mood state. We find that the application of a mechanical decision criterion, such as the maximization of expected value, immunizes men against effects of incidental emotions. 40% of the male participants indeed report applying expected values as decision criterion. Only a negligible number of women do so.

Keywords: prospect theory; probability weighting function; risk taking behavior; incidental emotions; rationality (search for similar items in EconPapers)
JEL-codes: D81 C91 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cbe, nep-exp and nep-upt
Date: 2007-02
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Persistent link: http://EconPapers.repec.org/RePEc:soz:wpaper:0703

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