The Affect Heuristic and Financial Expectations: Risk, Return, and ESG

55 Pages Posted: 20 Jul 2022

Date Written: July 8, 2022


In four well-powered experiments (N=1,195), I study an application of the affect heuristic to the evaluation of financial assets. The affect heuristic predicts that people derive expectations of return and risk from a global affective impression of an asset, which leads to negative risk-return correlations. Experimental results confirm the presence of an affect heuristic when evaluating individual stocks. Negative risk-return correlations emerge for aggregated results, as well as within individuals. However, a positive correlation found for asset classes suggests that the ease to recognize a risk-return trade-off can curb the reliance on the affect heuristic. Asking for required returns instead of expected returns also makes the risk-return trade-off more salient. Allowing people to select their most liked or disliked stocks, in contrast, exacerbates the use of the affect heuristic as participants presumably select stocks they feel most strongly about. In an extension, I show how the affect heuristic is used in evaluating ESG performance.

Keywords: Affect heuristic, dual process theory, return expectations, risk perception, correlation, risk-return trade-off, ESG, sustainability.

JEL Classification: G11, G23, G41, O33

Suggested Citation

Merkle, Christoph, The Affect Heuristic and Financial Expectations: Risk, Return, and ESG (July 8, 2022). Available at SSRN: or

Christoph Merkle (Contact Author)

Aarhus University ( email )

Nordre Ringgade 1
DK-8000 Aarhus C, 8000


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