Department of Economics and Business Economics

Closing a Mental Account: The Realization Effect for Gains and Losses

Research output: Contribution to journal/Conference contribution in journal/Contribution to newspaperJournal articleResearchpeer-review

  • Christoph Merkle
  • Jan Müller-Dethard, University of Mannheim, Germany
  • Martin Weber, University of Mannheim, Centre for Economic Policy Research, London
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 languageEnglish
JournalExperimental Economics
Volume24
Issue1
Pages (from-to)303-329
Number of pages27
ISSN1386-4157
DOIs
Publication statusPublished - Mar 2021

    Research areas

  • realization effect, Risk-Taking, house money effect, mental accounting

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