Mood-induced variation in risk preferences

Psychological research links good (bad) mood with increased (decreased) risk aversion. This relation has been widely documented in experimental setups. There has not been, however, a complementary analysis with real-life decisions data. This paper fills this gap by testing the relation between mood and risk attitude in capital markets. To shed light on that relation, we recover risk preferences from capital market data and employ accumulated evidence suggesting that people's mood is correlated with weather conditions. Corroborating established experimental evidence, we find that good (bad) mood is associated with investors being less (more) willing to tolerate risk. (C) 2003 Elsevier B.V. All rights reserved.