The Realization Effect: Risk-Taking after Realized versus Paper Losses
- (pp. 2086-2109)
AbstractUnderstanding how prior outcomes affect risk attitudes is critical for the study of choice under uncertainty. A large literature documents the significant influence of prior losses on risk attitudes. The findings appear contradictory: some studies find greater risk-taking after a loss, whereas others show the opposite—that people take on less risk. I reconcile these seemingly inconsistent findings by distinguishing between realized versus paper losses. Using new and existing data, I replicate prior findings and demonstrate that following a realized loss, individuals avoid risk; if the same loss is not realized, a paper loss, individuals take on greater risk.
Citation2016. "The Realization Effect: Risk-Taking after Realized versus Paper Losses." American Economic Review, 106(8): 2086-2109. DOI: 10.1257/aer.20140386
- D11 Consumer Economics: Theory
- D14 Household Saving; Personal Finance
- D81 Criteria for Decision-Making under Risk and Uncertainty
- G11 Portfolio Choice; Investment Decisions