Depression, Risk Preferences, and Risk-Taking Behavior

Abstract

Depression affects the way that people process information and make decisions, including those involving risk and uncertainty. Our objective is to analyze the way that depressive episodes shape risk preferences and risktaking behaviors. Using a large, representative German household data set, we find no disparity in the behavioral risk preferences of the mentally well versus those who are depressed, yet depression is related to people’s stated risk preferences and risk-taking behaviors in ways that are context-specific. We develop a conceptual model and show that differences in risk-taking behavior are largely explained by depression-related disparities in behavioral traits, such as locus of control, optimism, and trust.