Affective reactions influence investment decisions: evidence from a laboratory experiment with taxation

Martin Fochmann (), Johannes Hewig, Dirk Kiesewetter and Katharina Schüßler
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Martin Fochmann: University of Cologne
Johannes Hewig: University of Würzburg

Journal of Business Economics, 2017, vol. 87, issue 6, No 4, 779-808

Abstract: Abstract We experimentally investigate the effect of taxation of gains and losses on investment behavior. Based on the insights of economic research and psychological concepts, we expect subjects to react to taxation with behavioral and affective changes. Our main results are threefold: first, we show that taxation on gains and the possibility to deduct losses bias investment behavior, but in different directions. Since net payoffs are identical across all tax scenarios and therefore the same investment behavior is to be expected, these differences are in contrast to what a standard theory would predict. Second, we observe that different tax regulations have different effects on the affective and cognitive perception of our subjects. Third, with respect to possible connections of the affective and cognitive ratings, tax regulations, and investment decisions, we are able to show that arousal and risk perception fail to influence the decision making of participants, while there is a highly significant influence of valence perception on choice patterns.

Keywords: Decision making; Risk taking behavior; Behavioral taxation; Distorting taxation; Affect; Valence (search for similar items in EconPapers)
JEL-codes: C91 D14 H24 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (2)

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Working Paper: Affective reactions influence investment decisions: Evidence from a laboratory experiment with taxation (2014)
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DOI: 10.1007/s11573-016-0838-0

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