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.