Fear and Economic Behavior

Lina Andersson ()
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Lina Andersson: Department of Economics, School of Business, Economics and Law, Göteborg University, Postal: P.O. Box 640, SE 40530 GÖTEBORG, Sweden, http://economics.gu.se

No 819, Working Papers in Economics from University of Gothenburg, Department of Economics

Abstract: Fear is an important factor in decision-making under risk and uncertainty. Psychology research suggests that fear influences one’s risk attitude and fear may have important consequences for decisions concerning for example investments, crime, conflicts, and politics. I model strategic interactions between players who can be in either a neutral or a fearful state of mind. A player’s state of mind determines his or her utility function. The two main assumptions are that (i) fear is triggered by an increase in the probability or cost of negative outcomes and (ii) a player in the fearful state is more risk averse. A player’s beliefs over the probability and cost of negative outcomes determine how the player transitions between the states of mind. I use psychological game theory to analyze the role of fear in three applications, a robbery game, a bank run game, and a public health intervention.

Keywords: emotions; fear; risk aversion; psychological game theory (search for similar items in EconPapers)
JEL-codes: C72 D01 D91 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2022-02
New Economics Papers: this item is included in nep-cbe, nep-cwa, nep-evo, nep-gth, nep-hea, nep-his, nep-mic, nep-neu and nep-upt
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