Mood, Decision-Making and Risk Perceptions

Psychological researches have established a link between weather, mood and risk-taking decisions. Mood serves as a mediator in the relationship between surrounding environ- mental factors and individual decision-making. A growing body of research has targeted the role that mood plays in decision-making processes under conditions of risk. The re- sults show that mood can profoundly influence decision-making in risky situations and ultimately affects investment decisions (Johnson and Tversky, 1983; Slovic, 2010).

Some psychologists have built some solid theoretical background for the importances of mood in decision-making process. Schwarz (1990) developed the feelings-as-information theory to evaluate the influence of happy and sad moods in decision-making. He found that individuals frequently used their emotional state when making choices of process- ing strategies. In detail, the author stated that people in a negative mood tend to think their current situation is problematic and need longer time than usual to foster analytical processing strategies, whereas people in a positive mood usually made decisions much more quickly. Loewenstein et al. (2001) carried on and introduced the risk-as-feelings hypothesis and built a risk-as-feelings model that incorporated the role of mood experi- enced at the moment of decision-making. The risk-as-feeling model was developed based on a meta-analysis from clinical and physiological studies. The study concluded that emotional reactions to risky situations often diverge from cognitive assessments of those risks. When such divergence occurs, mood plays a vital role in risky decision-making process. The implication of the the risk-as-feelings hypothesis is that financial research should make it a routine to include investors’ mood information in models, together with probabilities and outcomes, to analyse financial decision-making.

Other psychologists tried to use experiments to prove that mood have a significant effect on decision-making process. Damasio (2008) aimed to investigate the relationship be- tween mood and optimal decision-making. The findings revealed that people with an im- paired ability to experience emotion have difficulty in making optimal decisions. Johnson and Tversky (1983) showed that moods induced by reading a newspaper article influenced subsequent risk judgements by testing two groups of people with different moods to sort some risk-relative factors which could cause death. The first group read some negative news that might lead to depression, the second group did not read the news. The results revealed the group of subjects which read negative news were less optimistic about the risk factors cause death than subjects did not read negative news, and they therefore con- cluded that people in negative moods are more pessimistic and tend to overestimated risky outcomes.

Williams et al. (2003) used a risk-assessment instrument to test 149 managers from a va- riety of industries and companies in the US. The test results showed that managers with positive emotions tended to view risk-related uncertainty more optimistically, but were not more willing to seek risks. Managers with negative emotions viewed risky choices pes- simistically and were also significantly more likely to avoid risk-taking behaviour. The results is consistent with studies from Deldin and Levin (1986); Yuen and Lee (2003) that people with negative emotions manifested less risk-taking behaviour. Jorgensen (1998) explained that people with negative emotions are more likely to perceive the threat of risky decisions and thus tend to avoid risky options. On the other hard, Nygren et al. (1996) denoted that people with positive moods can result in optimistic behaviour, hence positive outcomes become increasingly overestimated and negative outcomes become increasingly underestimated. The experiment carried out by Eisenberg et al. (1998) enhances the argu-

ment. In the experiment, participants with different degrees of depression were asked to choose some options at different risk levels. The findings showed that anxiety is positively correlated with risk aversion, as were depressive symptoms. Therefore, people who were anxious and depressive were more risk averse than people with neutral moods, which is expressed by less risk-taking and more favouring safe options.

In recent years, increasing attention has been paid to investigate the symptoms and be- haviour of SAD sufferers. SAD is a condition that affects people during the seasons of reducing hours of daylight. Mersch et al. (1999) aimed to assess the prevalence of SAD in The Netherlands by randomly selecting 5356 subjects, the result showed that subjects who met winter SAD criteria were significantly more depressed than other subjects.3 Magnus- son (2000) carried on and found seasonal variations in mood in 19 out of 20 SAD related retrospective studies and he argued that depressive symptoms usually peaking in winter and appeared to be a relatively common disorder which the prevalence varied across eth- nic groups. Kramer and Weber (2012) extended the SAD symptoms to risk-assessment process by studying 5000 on-line financial risk self-assessment survey results which were sent to university staff in 2008. They found that SAD sufferers exhibited stronger sea- sonal variations in aversion to financial risk than people who do not suffer from SAD. Therefore, in financial markets, investors who suffer SAD have lower return expectations in the fall than in other seasons, tending to shun risk, and refocus on rebalancing their investment portfolios and turn to relatively safe assets at this point in the year. These studies have documented that SAD sufferers experience depression in the fall when days become shorter and the depressive symptoms made they become more risk averse.

3 _{The subjects were asked to complete the Seasonal Pattern Assessment Questionnaire and the Centre for} Epidemiological Studies Depression Scale over a period of 13 months.

Generally, the literature stated that people with negative moods tended to make more pes- simistic judgements than when in neutral moods. Risk perceptions of people with positive moods are still a controversial topic, some made optimistic estimations and become less risk aversion; however, some other people with positive moods were afraid of loss and tended to avoid risks. Therefore, it is expected that SAD sufferers were more depressed and risk averse than normal people.