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Abstract
Research indicates that perceptions of investment risk are multi attribute and depend heavily on individual goals and experience as well as subjective asset characteristics such as distributions of possible returns. One attribute that has particular significance where the evaluation task is complex and time dependent is Affect. Affect refers to the positive or negative feeling state associated with a particular decision. Trust is one of the most recognized affective states as it is the implicit “backbone” of cooperative behavior. Trust is a “psychological state comprising the intention to accept vulnerability based upon expectations of the intentions and behavior of the trusted party.” It has been noted that there is hardly an economic transaction that does not involve trust to some degree. This brief paper is the first to empirically examine interpersonal trust as an attribute of individual investment risk perceptions and as an influence on aggregate market risk premiums. It also suggests that recent U.S. financial bubbles and crashes were, in part, trust-induced swarm behaviors.