Could stock market stress induce poorer financial decisions?

Los Angeles Times:

The Dow Jones industrial average’s wicked drops this week seem to have many investors turning to U.S. Treasury bonds and otherwise retreating into defensive economic positions to wait out the apparent financial meltdown.

But the results from a recent study indicated that stress, perhaps in the form of an unstable stock market or high unemployment, might cause people to make even more risky financial decisions.

A 2009 paper published in the journal Psychological Science showed how people’s decision-making changed in response to acute stress. They asked volunteers to stick a hand in either ice-cold water, to induce a stress response, or to dip it in stress-free, room-temperature water.

Then, the researchers presented the study participants with different financial gambles. Some gambles were risky — they were less likely to happen, but they offered a higher payout. Other gambles were more conservative — they were more likely to happen, but they offered a lower reward than the high-risk option.

Read the whole story: Los Angeles Times

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