Emotions and Exposure to Risk: the Influence of Positive and Negative Emotions on Portfolio Decisions

Abstract

This experimental study addresses the question of whether positive and negative emotions have an influence on diversification behaviour, and it reveals that only a small part of subjects take rational decisions and always choose the optimal portfolio. In addition, the study shows that the mood of subjects has an influence on their portfolio decisions and thus also on their exposure to risk. The average risk of the portfolio - measured against the standard deviation of the returns - is lower in the treatment entitled ‘neutral’ than in the treatments entitled ‘positive’ and ‘negative’. JEL classification numbers: C91, D81, G11, G41. Keywords: Emotions, Risk exposure, Laboratory experiment, Portfolio choice, Investment decisions, Investor rationality.

Impact of Sentiment on Households' Financial Decision Making

“…The decisions are made according to the households' perceptions of the economic trends and the expectations for the future (Kamdar 2019). The researchers investigate financial behaviour, and are interested in the impact of emotions, moods, and expectations as economic sentiment on household choices (Liu 2022, Filiz 2021, Bialowolski 2019, Kamdar 2019, Kusev et al 2017, Cryder et al 2008, Lerner and Keltner 2000). What appears to be missing in the literature is the research of the sentiment influence on the financial decision making at the collective level of the households.…”