Advertisement

Theory and Decision

, Volume 75, Issue 1, pp 17–41 | Cite as

Emotional balance and probability weighting

  • Narat Charupat
  • Richard Deaves
  • Travis Derouin
  • Marcelo Klotzle
  • Peter Miu
Article

Abstract

We find suggestive evidence that emotional balance has an impact on probability weighting incremental to demographic controls. Specifically, low negative affectivity (implying high emotional balance) tends to be a characteristic of those whose probability weighting functions exhibit lower curvature and more neutral elevation. In other words, emotional balance seems to push people in the direction of normative expected utility theory.

Keywords

Emotional balance Prospect theory Negative affectivity  Probability weighting 

Notes

Acknowledgments

An anonymous referee of this journal provided helpful comments, as did James Choi, Werner DeBondt, Mark Kamstra, Lisa Kramer, Andy Previtero, Kent Womack, and attendees at Queen’s University’s Annual Behavioral Finance Conference (2011) and National Taiwan University’s International Conference on Economics, Finance and Accounting (2011), along with workshops at Thammasat University of Thailand (2011) and National Cheng Chi University of Taiwan (2011). Remaining errors are our own responsibility.

Supplementary material

11238_2012_9348_MOESM1_ESM.pdf (2.4 mb)
Supplementary material 1 (pdf 2463 KB)

References

  1. Abdellaoui, M., Bleichrodt, H., & Paraschiv, C. (2008). Loss aversion under prospect theory: A parameter-free measurement. Management Science, 53, 1659–1674.CrossRefGoogle Scholar
  2. Barnea, A., Cronqvist, H., & Siegel, S. (2010). Nature or nurture: What determines investor behavior? Journal of Financial Economics, 98, 583–604.CrossRefGoogle Scholar
  3. Barrett, L. F. (1998). Discrete emotions or dimensions? The role of valence focus and arousal focus. Cognition and Emotion, 12, 579–599.CrossRefGoogle Scholar
  4. Bechara, A., Damasio, H., Tranel, D., & Damasio, A. R. (1997). Deciding advantageously before knowing the advantageous strategy. Science, 275, 1293–1295.CrossRefGoogle Scholar
  5. Booij, A. S., van Praag, B. M. S., & van de Kuilen, G. (2010). A parametric analysis of prospect theory’s functionals for the general population. Theory and Decision, 68(1–2), 115–148.CrossRefGoogle Scholar
  6. Brackett, M., & Mayer, J. (2003). Convergent, discriminant, and incremental validity of competing measures of emotional intelligence. Personality and Psychology Bulletin, 29, 1147–1158.CrossRefGoogle Scholar
  7. Bruhin, A., Fehr-Duda, H., & Epper, T. (2010). Risk and rationality: Uncovering heterogeneity in probability distortion. Econometrica, 78, 1375–1412.CrossRefGoogle Scholar
  8. Cesarini, D., Johannesson, M., Lichtenstein, P., Sandewall, O., & Wallace, B. (2010). Genetic variation in financial decision-making. Journal of Finance, 65, 1725–1754.CrossRefGoogle Scholar
  9. Dhar, R., & Wertenbroch, K. (2000). Consumer choice between hedonic and utilitarian goods. Journal of Marketing Research, 37, 60–71.CrossRefGoogle Scholar
  10. Edmans, A., Garcia, D., & Norli, O. (2007). Sports sentiment and stock returns. Journal of Finance, 62, 1967–1998.CrossRefGoogle Scholar
  11. Edwards, W. (Ed.). (1992). Utility theories: Measurements and applications. Kluwer Academic Publishers, Dordrecht, the Netherlands.Google Scholar
  12. Etchart-Vincent, N., & l’Haridon, O. (2011). Monetary incentives in the loss domain and behavior towards risk: An experimental comparison of three reward schemes including real losses. Journal of Risk and Uncertainty, 42, 61–83.CrossRefGoogle Scholar
  13. Fehr-Duda, H., de Gennaro, M., & Schubert, R. (2006). Gender, financial risk and probability weights. Theory and Decision, 60, 283–313.CrossRefGoogle Scholar
  14. Gohm, C. L., & Clore, G. L. (2000). Individual differences in emotional experience: Mapping available scales to processes. Personality and Social Psychology Bulletin, 26, 679–697.CrossRefGoogle Scholar
  15. Goldstein, W. M., & Einhorn, H. J. (1987). Expression theory and the preference reversal phenomena. Psychological Review, 94, 236–54.CrossRefGoogle Scholar
  16. Hirshleifer, D., & Shumway, T. (2003). Good day sunshine: Stock returns and the weather. Journal of Finance, 58(3), 1009–1032.CrossRefGoogle Scholar
  17. Johnson, E. J., Hershey, J., Meszaros, J., & Kunreuther, H. (1993). Framing, probability distortions and insurance decisions. Journal of Risk and Uncertainty, 7, 35–51.CrossRefGoogle Scholar
  18. Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47, 263–291.CrossRefGoogle Scholar
  19. Kamstra, M. J., Kramer, L. A., & Levi, M. D. (2000). Losing sleep at the market: The daylight saving anomaly. American Economic Review, 90, 1005–1011.CrossRefGoogle Scholar
  20. Kamstra, M. J., Kramer, L. A., & Levi, M. D. (2003). Winter blues: A SAD stock market cycle. American Economic Review, 93, 724–743.CrossRefGoogle Scholar
  21. Kaplanski, G., & Levy, H. (2010). Sentiment and stock prices: The case of aviation disasters. Journal of Financial Economics, 95, 174–201.CrossRefGoogle Scholar
  22. Larsen, R. J., & Buss, D. M. (2008). Personality psychology (3rd ed.). New York: McGraw-Hill.Google Scholar
  23. Lo, A. W., & Repin, D. V. (2002). The psychophysiology of real-time financial risk processing. Journal of Cognitive Neuroscience, 13, 323–339.CrossRefGoogle Scholar
  24. Lo, A. W., Repin, D. V., & Steenbarger, B. N. (2005). Fear and greed in financial markets: A clinical study of day traders. Working paper.Google Scholar
  25. Loewenstein, G. F. (1996). Out of control: Visceral influences on behavior. Organizational Behavior and Human Decision Processes, 65, 272–292.CrossRefGoogle Scholar
  26. Loewenstein, G. F. (2000). Emotions in economic theory and economic behavior. American Economic Review, 90, 426–432.CrossRefGoogle Scholar
  27. Loewenstein, G., Weber, E. U., Hsee, C. K., & Welch, N. (2001). Risk as feelings. Psychological Bulletin, 127, 267–286.CrossRefGoogle Scholar
  28. MacGregor, D. G., Slovic, P., Dreman, D., & Berry, M. (2000). Imagery, affect, and financial judgment. Journal of Psychology and Financial Markets, 1, 104–110.CrossRefGoogle Scholar
  29. Mano, H. (1994). Risk-taking, framing effects and affect. Organizational Behavior and Human Decision Processes, 57, 59–82.CrossRefGoogle Scholar
  30. Mayer, J. D., Roberts, R. D., & Barsade, S. G. (2008). Human abilities: Emotional intelligence. Annual Review of Psychology, 59, 507–536.CrossRefGoogle Scholar
  31. Petrides, K. V., & Furnham, A. (2000). On the dimensional structure of emotional intelligence. Personality and Individual Differences, 29, 313–320.CrossRefGoogle Scholar
  32. Prelec, D. (1998). The probability weighting function. Econometrica, 66, 497–528.CrossRefGoogle Scholar
  33. Rottenstreich, Y., & Hsee, C. K. (2001). Money, kisses and electric shocks: On the affective psychology of risk. Psychological Science, 12, 185–190.CrossRefGoogle Scholar
  34. Salovey, P., & Mayer, J. D. (1990). Emotional intelligence. Imagination, Cognition and Personality, 9, 185–211.CrossRefGoogle Scholar
  35. Schutte, N. S., et al. (1998). Development and validation of a measure of emotional intelligence. Personality and Individual Differences, 25, 167–177.CrossRefGoogle Scholar
  36. Shiv, B., Loewenstein, G., Bechara, A., Damasio, A., & Damasio, H. (2005). Investment behavior and the dark side of emotion. Psychological Science, 16, 435–439.Google Scholar
  37. Stott, H. P. (2006). Cumulative prospect theory’s functional menagerie. Journal of Risk and Uncertainty, 32, 101–130.CrossRefGoogle Scholar
  38. Summers, B., & Duxbury, D. (2007). Unraveling the disposition effect: The role of prospect theory and emotions. Working paper.Google Scholar
  39. Thompson, E. R. (2007). Development and validation of an internationally reliable short-form of the positive and negative affect schedule. Journal of Cross-cultural Psychology, 38, 227–242.CrossRefGoogle Scholar
  40. Tversky, A., & Kahneman, D. (1992). Advances in prospect theory: Cumulative representation of uncertainty. Journal of Risk and Uncertainty, 5, 297–323.Google Scholar
  41. von Gaudecker, H.-M., van Soest, A., & Wengström, E. (2011). Heterogeneity in risky choice behavior in a broad population. American Economic Review, 101, 664–694.CrossRefGoogle Scholar
  42. Wakker, P. P. (2010). Prospect theory for risk and ambiguity. Cambridge, UK: Cambridge University Press.Google Scholar
  43. Watson, D., & Clark, L. A. (1984). Negative affectivity: The disposition to experience aversive emotional states. Psychological Bulletin, 96, 465–490.CrossRefGoogle Scholar
  44. Watson, D., Clark, L. A., & Tellegen, A. (1988). Development and validation of brief measures of positive and negative affect: The PANAS scales. Journal of Personality and Social Psychology, 54, 1063–1070.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media New York 2012

Authors and Affiliations

  • Narat Charupat
    • 1
  • Richard Deaves
    • 1
  • Travis Derouin
    • 2
  • Marcelo Klotzle
    • 3
  • Peter Miu
    • 1
  1. 1.McMaster UniversityHamiltonCanada
  2. 2.WikihowWashingtonUSA
  3. 3.PUC—RioRio de JaneiroBrazil

Personalised recommendations