American Economic Review Vol. 106 No. 8 2016
The Realization Effect: Risk-Taking After Realized Versus Paper Losses
open access
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.
- DOI
- 10.1257/aer.20140386
- Volume
- 106
- Issue
- 8
- Pages
- 2086-2109
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref