Lina Andersson, University of Gothenburg

"Fear and Economic Behavior"

Abstract

Fear is an important factor in economic decision making, and may for example influence investments, conflicts, crime, and politics. I model strategic interactions between players who can be either in a neutral or a fearful state of mind. The state of mind determines the players' utility functions. My two main assumptions are that a fearful player is more concerned with risk and that fear is triggered after a sufficiently large increase in the player's expected cost of negative outcomes. I normalize the payoffs such that only outcomes bad enough to, potentially, instill fear when anticipated have a negative payoff. A player's beliefs over the expected cost of negative outcomes determine the player's transitions between the states of mind, and I use psychological game theory in the analysis of my applications. I show how fear can spread among bank clients and cause a bank panic, and how a player can use fear to bring about a desired outcome. I also illustrate the tendency of fear to amplify the behavioral response to an adverse event.

Contact person: Johan Lagerlöf