Some experiments at the Max Planck Institute in Jena by a team led by Chiara Nardi of the University of Verona established this. They showed subjects film clips to make them feel happy, sad, fearful or angry and then got them to choose between different types of lotteries. They found that men who became angry, fearful or happy took on more risk than those in more neutral states. And although women's risk appetite wasn't affected by sadness, fear or anger, it was increased by happiness.
There's a simple reason for this. Happier people are more likely to look on the bright side and so overestimate their chances of success, while fear and anger can get us ready to fight - and fighting is a risky strategy.
The researchers found that sadness did not affect risk appetite. This is perhaps because it has ambiguous effects. On the one hand, it can lead to mood repair strategies; we take risk in the hope that a win will cheer us up. But, on the other hand, it increases our awareness of potential losses. The two cancel out. This doesn't, however, mean that sadness doesn't affect our financial choices. Other research has found that it does, because it increases our present bias and so causes us to save less and borrow more.
Now, it's not irrational in itself to take risks; how much risk you take is ultimately a matter of taste. What is dangerous, though, is taking decisions when emotionally aroused which we later regret in our cooler-headed moments. And if the mild emotions triggered by film clips can affect investment decisions, it's likely that the stronger ones provoked by the aggravations of everyday life will have even bigger effects.
Nor does this mean that emotions are a bad thing. Without them, nothing much would matter to us, and so we'd have little incentive to work or save: one reason why married men earn more than singletons is that the love of their family causes them to work harder.
Nevertheless, this research has two implications.
First, it helps explain several stock market anomalies such as the tendency (on average) for shares to do well: on sunny days; on Fridays; before holidays; and - most notably - in the spring. Our better moods on these occasions raise share prices. Markets are not driven merely by a purely rational assessment of risk and reward.
Secondly, this is a warning to us not to make stock trades when we're in a mood - any mood. Perhaps one reason why frequent trading loses money is that people who trade often are more likely to do so when they are in an emotional state. One virtue of rules of thumb is that they take the emotions out of investing.
