Emotions and decision making: The relevance of risk and regret
The role of emotions in decision making is one of the most studied topics in behavioural sciences due to the impact of emotional experiences on people’s choices. However, people’s attitude towards risk and ability to detect potential regret are also important determinants of people’s behaviour. This essay aims to make a review of the role of emotions in decision making and to discuss the relevance of individuals’ risk attitude and ability to detect regret at the moment of making a decision. Investor decision-making is used as a means to show these ideas due to the nature of this type of decision.
Baker, K., & Ricciardi, V. (2014). Investor behaviour. The psychology of financial planning and investing. John Wiley & Sons, Hoboken, New Jersey.
Bechara, A., Damasio, A. R., Damasio, H., & Anderson, S.W. (1994). Insensitivity to future consequences following damage to human prefrontal cortex. Cognition, 50, 7–15.
Bechara, A., Damasio, H., & Damasio, A. R. (2000). Emotion, decision making and the orbitofrontal cortex. Cerebral cortex, 10(3), 295-307.
Bentham, J. (1948). [Originally published, 1789]. An introduction to the principles of morals and legislation. New York, Macmillan.
Berkowitz, L. (1990). On the formation and regulation of anger and aggression. A cognitive-neoassociationistic analysis. The American Psychologist, 45(4), 494–503.
Benartzi, S., & Thaler, R. (2005). Myopic loss aversion and the equity premium puzzle. Advances in Behavioral Finance, 110(1), 202–223.
Camerer, C., & Lovallo, D. (1999). Overconfidence and excess entry: An experimental approach. The American Economic Review, 89(1), 306–318.
Damasio, A. (1994). Descartes' error: Emotion, reason and the human brain. New York: Grosset/Putnam
Darwin, C. (1899). The expression of the emotions in man and animals. (O. U. Press, Ed.).
Descartes, R. (1649). The Passions of the Soul. The Philosophical Writings of Descartes.
Ekman, P. (1992). Are there basic emotions? Psychological Review, 99(3), 550–553.
Epstein, S. (1984). Controversial issues in emotion theory. Review of personality and social psychology 5, 64-88.
Filiz-Ozbay, E., & Ozbay, E. Y. (2007). Auctions with anticipated regret: Theory and experiment. American Economic Review, 97(4), 1407–1418.
Finucane, M. L., Alhakami, A., Slovic, P., & Johnson, S. M. (2000). The affect heuristic in judgments of risks and benefits. Journal of Behavioral Decision Making, 13, 1–17.
Freud, S. (1922). The unconscious. The Journal of Nervous and Mental Disease, 56(3), 291-294.
Henry, C. (1974). Investment decisions under uncertainty: The “Irreversibility Effect”. The American Economic Review, 74(6), 1006–1012.
Hess, U., & Thibault, P. (2009). Darwin and emotion expression. The American Psychologist, 64(2), 120–128.
Isen, A. M. (2001). An influence of positive affect on decision making in complex situations: Theoretical issues with practical implications. Journal of Consumer Psychology, 11(2), 75–85.
Kahneman, D., & Tversky, A. (1974). Judgment under Uncertainty: Heuristics and Biases. Science, 185(4157), 1124–1131.
Kahneman, D., & Tversky, A. (1979). Prospect Theory: An analysis of decision under risk. Econometrica, 47, 263–291.
Kahneman, D., & Riepe, M. W. (1998). Aspects of investor psychology. The Journal of Portfolio Management, 24(2), 52–65.
Lazarus, R.S. (1982). Thoughts on the relations between emotion and cognition. American Psychologist, 37, 1019–1024.
Lerner, J.S., Li, Y., Valdesolo, P., & Kassam, K.S. (2015). Emotion and decision making. Annual Review of Psychology, 66, 799–823.
Lo, A. W., & Repin, D. V. (2001). The psychophysiology of real-time financial risk processing. NBER Working Paper no. 8508.
Loewenstein, G. (2000). Emotions in economic theory and economic behavior. The American Economic Review, 90(2), 426-432.
Loewenstein, G. (2005). Hot-cold empathy gaps and medical decision making. Health Psycholog, 24(4), S49–S56.
Loewenstein, G., & Lerner, J. S. (2003). The role of affect in decision making. In Handbook of Affective Science. Chapter 31, 619-642.
Loewenstein, G. F., Weber, E. U., Hsee, C. K., & Welch, N. (2001). Risk as feelings. Psychological Bulletin, 127(2), 267–286.
Loomes, G., & Sugden, R. (1982). Regret Theory: An alternative of rational choice under uncertainty. The Economic Journal, 92(368), 805-824.
Lyubomirsky, S., King, L., & Diener, E. (2005). The benefits of frequent positive affect: does happiness lead to success? Psychological Bulletin, 131(6), 803–855.
Markowitz, H. (1952). Portfolio selection. The Journal of Finance, 7(1), 77-91.
Mehra, R., & Sah, R. (2002). Mood fluctuations, projection bias and volatility of equity prices. Journal of Economic Dynamics and Control, 26, 869–887.
Metcalfe, J., & Mischel, W. (1999). A Hot/Cool-system analysis of delay of gratification: Dynamics of willpower. Psychological Review, 106(1), 3–19.
Miller, M. H. (1986). Behavioral rationality in finance: The case of dividends. Journal of Business, S451-S468.
Parkinson, B. (1995). Ideas and realities of emotion. Psychology Press.
Parrott, W. (2001), Emotions in Social Psychology. Psychology Press, Philadelphia.
Plato. (380 BC). The Republic. Written in 380 BC, edition used Penguin Classics 2012.
Romer, P. (2000). Thinking and feeling. The American Economic Review, 90(2), 439–443.
Sauter, D. A., Eisner, F., Ekman, P., & Scott, S. K. (2010). Cross-cultural recognition of basic emotions through nonverbal emotional vocalizations. Preceedings of the National Academy of Sciences, 107(6), 2408-2412.
Schlösser, T., Dunning, D., & Fetchenhauer, D. (2013). What a feeling: The role of immediate and anticipated emotions in risky decisions. Journal of Behavior and Decision Making, 26, 13–30.
Shefrin, H. (2000). Beyond greed and fear: Understanding behavioral finance and the psychology of investing. Oxford University Press.
Shiv, B., Loewenstein, G., Bechara, A., Damasio, H., Antonio, R., & Damasio, A. R. (2005). Investment behaviour and the negative side of emotion, Psychological Science, 16(6), 435–439.
Simon, H. A. (1955). A behavioral model of rational choice. The Quarterly Journal of Economics, 69(1), 99-118.
Slovic, P. (2000). The Perception of Risk. London: Earthscan.
Slovic, P., Finucane, M. L., Peters, E., & MacGregor, D. G. (2002). The affect heuristic. In D. Kahneman (Ed.), Heuristics and Biases: The Psychology of Intuitive Judgment. Cambridge: Cambridge University Press.
Smith, A. (1759/1976). A theory of moral sentiments. Oxford University Press.
Stanovich, K.E., & West, R.F. (2000). Individual differences in reasoning: implications for the rationality debate? Behavioral and Brain Sciences, 23, 645–726.
Tversky, A., & Kahneman, D. (1974). Judgment under uncertainty: Heuristics and Biases. Science, 185(4157), 1124–1131.
Tversky, A., & Kahneman, D. (1981). The framing of decisions and the psychology of choice. Science, 211(4481), 453–458.
Von Neumann, J., & Morgenstern, O. (1944). Theory of Games and Economic Behavior. Princeton, NJ. Princeton University Press.
Zajonc, R. B. (1980). Feeling and thinking: Preferences need no inference. The American Psychologist, 35, 151-17.