American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
The Realization Effect: Risk-Taking after Realized versus Paper Losses
American Economic Review
vol. 106,
no. 8, August 2016
(pp. 2086–2109)
(Complimentary)
Abstract
Understanding 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.Citation
Imas, Alex. 2016. "The Realization Effect: Risk-Taking after Realized versus Paper Losses." American Economic Review, 106 (8): 2086–2109. DOI: 10.1257/aer.20140386Additional Materials
JEL Classification
- D11 Consumer Economics: Theory
- D14 Household Saving; Personal Finance
- D81 Criteria for Decision-Making under Risk and Uncertainty
- G11 Portfolio Choice; Investment Decisions