The influence of mood on the willingness to take financial risks

Abstract

The purpose of this study was to determine whether support could be found for either the Affect Infusion Model or the Mood Maintenance Hypothesis regarding how mood influences financial risk tolerance. An ordinary least‐squares regression model was used to determine if people who exhibited a happy mood at the time they completed a survey scored differently than those who were not happy. In a sample (n = 460) of employed mid‐western respondents between the ages of 18 and 75 years, being in a happy mood was positively associated with having a higher level of financial risk tolerance, holding biopsychosocial and environmental factors constant. Support for the Affect Infusion Model was obtained.

Keywords:

• risk tolerance
• mood
• emotions
• risk‐as‐feelings
• risky decisions

Notes

1. In fact, much of the literature indicates that financial risk tolerance, which is defined as a person's willingness to engage in ‘behaviors in which the outcomes remain uncertain with the possibility of an identifiable negative outcome’ (Irwin 1993, 11), is closely associated with financial behaviors as described by MPT and CAPM (Hariharan, Chapman, and Domian 2000; Irwin 1993; Morse 1998; Trone, Allbright, and Taylor 1996). For example, Hariharan and his associates found that ‘increased risk tolerance reduces an individual's propensity to purchase risk‐free assets’ (159). As predicted by MPT, high risk tolerance tends to be associated with the propensity to save (Cavanagh and Sharpe 2002; Chang 1994; Chen and Finke 1996; Huston and Chang 1997), the likelihood of owning investment assets (Xiao 1996), and participating in retirement plans (Yuh and DeVaney 1996).