Abstract
How do risk attitudes change after experiencing gains or losses? For the case of losses, Imas (2016) shows that subsequent risk-taking behavior depends on whether these losses have been realized or not. After a realized loss, individuals’ risk-taking decreases, whereas it increases after an unrealized (paper) loss. He refers to this asymmetry as the realization effect. In this study, we derive theoretical predictionsfor risk-taking after paper and realized gains, and for investment opportunities with different skewness. We experimentally test these predictions and, at the same time, replicate Imas’ original study. Independent of a prior gain or loss, we show that subsequent risk-taking is higher when outcomes remain unrealized. However, we find no evidence of a realization effect for non-positively skewed lotteries. While the first result suggests that the effect is more general, the second result reveals its boundary conditions.
| Original language | English |
|---|---|
| Journal | Experimental Economics |
| Volume | 24 |
| Issue | 1 |
| Pages (from-to) | 303-329 |
| Number of pages | 27 |
| ISSN | 1386-4157 |
| DOIs | |
| Publication status | Published - Mar 2021 |
Keywords
- realization effect
- Risk-Taking
- house money effect
- mental accounting