The Emotional Side of Anomalous Choice Behavior

Two decades of experimentation has shown that everyday decisions are often not in line with the reigning economic theory of rational decision making, subjective expected utility (Savage 1954). An explanation for this behavior, first put forth in economics by Keynes (1936), is that decisions are often taken as a result of animal spirits; decisions are often based on emotions rather than on deliberate thinking. Nevertheless, the relation between emotions and core anomalies in the field of risky choice behavior has not been investigated so far, possibly because a method to directly measure and quantify multiple emotions was not available. The aim of this project is to deepen our understanding of the role of animal spirits in anomalous choice behavior by introducing face-reading -- ?a method that allows one to directly quantify and interpret physiological responses to stimuli in terms of the six basic universal emotions via facial expressions -- ?to economics. In particular, in five sub-projects, we propose to investigate (i) whether emotions affect the formation, weighting, and updating of subjective beliefs, (ii) whether risky decisions depend on the emotional response to the source that generates the uncertainty and the domain in which decisions are made, (iii) whether aversion towards losses and ambiguity is driven by emotions, (iv) whether we can identify the reference point with data on emotions, and (v) how existing decision making models should be adjusted to account for the role of emotions. Getting insight in the relationship between emotions and these choice anomalies is crucial because they form the basis for many popular non-expected utility models. The proposed research is innovative both in terms of scientific content (the role of emotions in anomalous choice behavior) as well as in terms of methodology (face-reading) and will provide the first systematic mapping between core concepts of behavioral economics and psychological notions of emotion.