 Tail events, emotions and risk takingBrice Corgnet, Camille Cornand and Nobuyuki Hanaki No 2016, Working Papers from Groupe d'Analyse et de Théorie Economique Lyon St-Etienne (GATE Lyon St-Etienne), Université de Lyon Abstract: Recent works have shown how tail events could account for ?nancial anomalies such as the equity premiumpuzzle. These models do not explore, however, why investors would discount tail risk so heavily. We take on this challenge by designing a novel tail-event experiment to assess both investors’ behavioral and physiological reactions. We show that investors who observe the tail event without su?ering losses tend to decrease their pricing of the asset subsequently. By contrast, loss-averse investors who su?er tail losses tend to increase their bids. This response is especially pronounced for those who exhibit a strong emotional response to tail losses. This demonstrates the key role played by emotions in in?uencing investors’ response to tail events. Finally, investors who exhibit high anticipatory arousal, as measured with electrodermal activity, posted lower bids and were less likely to su?er tail losses and go bankrupt. They also achieved higher earnings when tail events occurred frequently. This ?nding contrasts with the common view that investors should silence their emotions. Keywords: tail events; emotions and risk (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:gat:wpaper:2016 Access Statistics for this paper More papers in Working Papers from Groupe d'Analyse et de Théorie Economique Lyon St-Etienne (GATE Lyon St-Etienne), Université de Lyon Contact information at EDIRC. |
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