the realization effect risk taking after realized versus paper losses 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 jel d11 d14 d81 g11

individual risk attitudes measurement determinants and behavioral consequences this paper studies risk attitudes using a large representative survey and a complementary experiment conducted with a representative subject pool in subjects homes using a question asking people about their willingness to take risks in general we find that gender age height and parental background have an economically significant impact on willingness to take risks the experiment confirms the behavioral validity of this measure using paid lottery choices turning to other questions about risk attitudes in specific contexts we find similar results on the determinants of risk attitudes and also shed light on the deeper question of stability of risk attitudes across contexts we conduct a horse race of the ability of different measures to explain risky behaviors such as holdings stocks occupational choice and smoking the question about risk taking in general generates the best all round predictor of risky behavior

causes consequences and cures of myopic loss aversion an experimental investigation we examine in an experiment the causes consequences and possible cures of myopic loss aversion mla for investment behaviour under risk we find that both investment horizons and feedback frequency contribute almost equally to the effects of mla longer investment horizons and less frequent feedback lead to higher investments however when given the choice subjects prefer on average shorter investment horizons and more frequent feedback exploiting the status quo bias by setting a long investment horizon or low feedback frequency as a default turns out to be a successful behavioural intervention that increases investment levels

do professional traders exhibit myopic loss aversion an experimental analysis two behavioral concepts loss aversion and mental accounting have been combined to provide a theoretical explanation of the equity premium puzzle recent experimental evidence supports the theory as students behavior has been found to be consistent with myopic loss aversion mla yet much like certain anomalies in the realm of riskless decision making these behavioral tendencies may be attenuated among professionals using traders recruited from the cbot we do indeed find behavioral differences between professionals and students but rather than discovering that the anomaly is muted we find that traders exhibit behavior consistent with mla to a greater extent than students

paying not to go to the gym how do consumers choose from a menu of contracts we analyze a novel dataset from three u s health clubs with information on both the contractual choice and the day to day attendance decisions of 7 752 members over three years the observed consumer behavior is difficult to reconcile with standard preferences and beliefs first members who choose a contract with a flat monthly fee of over 70 attend on average 4 3 times per month they pay a price per expected visit of more than 17 even though they could pay 10 per visit using a 10 visit pass on average these users forgo savings of 600 during their membership second consumers who choose a monthly contract are 17 percent more likely to stay enrolled beyond one year than users committing for a year this is surprising because monthly members pay higher fees for the option to cancel each month we also document cancellation delays and attendance expectations among other findings leading explanations for our findings are overconfidence about future self control or about future efficiency overconfident agents overestimate attendance as well as the cancellation probability of automatically renewed contracts our results suggest that making inferences from observed contract choice under the rational expectation hypothesis can lead to biases in the estimation of consumer preferences

planned versus actual betting in sequential gambles abstract anecdotal evidence indicates that in a gambling environment consumers may end up betting more than they had initially planned the authors assess this phenomenon in a series of three experiments in which people are exposed to sequential and fair gambles in a two stage process planned and actual bets the results show that in the planning phase people behave conservatively betting on average less after an anticipated loss and the same amount after an anticipated gain however after experiencing an actual loss in the first gamble people bet in a subsequent gamble significantly more than they had initially planned whereas on average there were no observable differences from the plan after an actual gain the reason for such asymmetry is due in part to people s tendency to underestimate at the planning phase of the gamble the impact of negative emotions in betting decisions during the actual phase of the gamble

the effect of myopia and loss aversion on risk taking an experimental test myopic loss aversion is the combination of a greater sensitivity to losses than to gains and a tendency to evaluate outcomes frequently two implications of myopic loss aversion are tested experimentally 1 investors who display myopic loss aversion will be more willing to accept risks if they evaluate their investments less often 2 if all payoffs are increased enough to eliminate losses investors will accept more risk in a task in which investors learn from experience both predictions are supported the investors who got the most frequent feedback and thus the most information took the least risk and earned the least money language en

are risk aversion and impatience related to cognitive ability is the way that people make risky choices or tradeoffs over time related to cognitive ability this paper investigates whether there is a link between cognitive ability risk aversion and impatience using a representative sample of the population and incentive compatible measures we conduct choice experiments measuring risk aversion and impatience over an annual time horizon for a randomly drawn sample of roughly 1 000 german adults subjects also take part in two different tests of cognitive ability which correspond to sub modules of one of the most widely used iq tests interviews are conducted in subjects own homes we find that lower cognitive ability is associated with greater risk aversion and more pronounced impatience these relationships are significant and robust to controlling for personal characteristics educational attainment income and measures of credit constraints we perform a series of additional robustness checks which help rule out other possible confounds

individual preferences monetary gambles and stock market participation a case for narrow framing we argue that narrow framing whereby an agent who is offered a new gamble evaluates that gamble in isolation may be a more important feature of decision making than previously realized our starting point is the evidence that people are often averse to a small independent gamble even when the gamble is actuarially favorable we find that a surprisingly wide range of utility functions including many nonexpected utility specifications have trouble explaining this evidence but that this difficulty can be overcome by allowing for narrow framing our analysis makes predictions as to what kinds of preferences can most easily address the stock market participation puzzle

an experiment on risk taking and evaluation periods does the period over which individuals evaluate outcomes influence their investment in risky assets results from this study show that the more frequently returns are evaluated the more risk averse investors will be the results are in line with the behavioral hypothesis of myopic loss aversion which assumes that people are myopic in evaluating outcomes over time and are more sensitive to losses than to gains the results have relevance for the equity premium puzzle and also for the marketing strategies of fund managers

a monopolistic market for information abstract we analyze a model where traders buy information from a monopolistic seller which is subsequently used in a speculative market in order to overcome the dilution in the value of information due to its leakage through informative prices the seller of information may prefer to sell noisier versions of the information he actually has moreover to obtain higher profits it is desirable for the seller to sell different signals to different traders so that the added noise realizations do not affect equilibrium prices one way of doing so which does not require discrimination is to sell identically distributed personalized signals to each of a large number of traders

evidence for countercyclical risk aversion an experiment with financial professionals countercyclical risk aversion can explain major puzzles such as the high volatility of asset prices evidence for its existence is however scarce because of the host of factors that simultaneously change during financial cycles we circumvent these problems by priming financial professionals with either a boom or a bust scenario subjects primed with a financial bust were substantially more fearful and risk averse than those primed with a boom suggesting that fear may play an important role in countercyclical risk aversion the mechanism described here is relevant for theory and may explain self reinforcing processes that amplify market dynamics jel e32 e44 g01 g11 g12

poker player behavior after big wins and big losses we find that experienced poker players typically change their style of play after winning or losing a big pot most notably playing less cautiously after a big loss evidently hoping for lucky cards that will erase their loss this finding is consistent with kahneman and tversky s kahneman d a tversky 1979 prospect theory an analysis of decision under risk econometrica47 2 263 292 break even hypothesis and suggests that when investors incur a large loss it might be time to take a vacation or be monitored closely

the supply of information by a concerned expert how much information should a policy maker pass on to a currently ill informed citizen in this paper we address this classic question of crawford and sobel 1983 in a setting in which beliefs impact utility as in kreps and porteus 1978 we show that this simple amendment has far reaching implications in particular our question cannot be answered using a utility function with standard revealed preference foundations revealed preference cannot tell us whether in a particular state s a decision maker prefers to believe incorrectly that the state is t or to know the truth to solve the model we go beyond the classical model in two respects relying on the psychological expected utility model of caplin and leahy 2001 to capture preferences and the psychological game model of geanakoplos pearce and stacchetti 1989 to capture strategic interactions

dividends and the frozen orange juice syndrome the bonanza of a 15 percent top bracket federal income tax on dividends has had little impact on values in the stock market or on management decisions about dividend payout ratios the question is why dividends matter yet investors have forgotten how to think about such factors this article explains the phenomenon in the form of the frozen orange juice syndrome and describes through four chapters of history how the situation arose

does commitment or feedback influence myopic loss aversion an experimental analysis empirical research has shown that a lower feedback frequency combined with a longer bind ing period decreases myopia and thereby increases the willingness to invest into a risky asset in an experimental study we disentangle the intertwined manipulation of feedback frequency and binding period to analyze how both variables alone contribute to the change in myopia and how they interact we find a strong effect for the length of commitment a much less pro nounced effect for the feedback frequency and a strong interaction between both variables the results have important implications for real world intertemporal decision making

how persistent are the effects of experience sampling on investor behavior abstract investor behavior was shown to be considerably different when the risk return tradeoff is presented by experience sampling as opposed to a descriptive communication we analyze the persistency of this difference in a setting in which investors are faced with multiple decisions over time and are consequently able to adjust the risk level they initially chose for this we use an experimental setting with repeated investment decisions over multiple trading days and we also test a new form of risk simulation in which wealth paths over time are presented rather than just final outcomes after investors initial decisions for which we confirm previous findings we do not find persistent differences of simulation based learning on investors risk taking behavior with regards to trading volume only a simulation in which investors see wealth paths and not only final outcomes leads to lower trading frequency soon after the initial asset allocation

does aggregated returns disclosure increase portfolio risk taking many experiments have found that participants take more investment risk if they see returns less frequently see portfolio level returns rather than each individual asset s returns or see long horizon rather than one year historical return distributions in contrast we find that such information aggregation treatments do not affect total equity investment when we make the investment environment more realistic than in prior experiments previously documented aggregation effects are not robust to changes in the risky asset s return distribution or the introduction of a multi day delay between portfolio choice and return realizations

psychological expected utility theory and anticipatory feelings we extend expected utility theory to situations in which agents experience feelings of anticipation prior to the resolution of uncertainty we show how these anticipatory feelings may result in time inconsistency we provide an example from portfolio theory to illustrate the potential impact of anticipation on asset prices

portfolio choice and risk attitudes an experiment i introduction suppose an investor is faced with a decision concerning how to allocate financial resources between a risky lottery asset with a higher expected return and an asset with a fixed and guaranteed lower return is the choice of portfolio independent of preferences outside the standard neoclassical model in experiments with financial incentives we study how portfolio choice depends on three well documented behavioral phenomena ambiguity aversion the illusion of control and myopic loss aversion we also investigate whether participants are willing to explicitly pay a small sum of money to indulge such preferences pay for more perceived control less ambiguity or more frequent opportunities to change the portfolio based on feedback about its performance while standard finance theory presumes that investors successfully identify and process information relevant to reaching optimal decisions in recent years a body of empirical evidence suggests that there are systematic departures from this behavior behavioral finance is concerned with psychological influences in financial decision making and markets investors make decisions while trying to stay afloat in a sea of uncertainty when predictability is low people may be prone to unjustified beliefs that may survive and even flourish in such an environment 1 people may resort to rules of thumb on a conscious or subconscious level to the extent that psychological influences are present it is economically important to consider which of these actually affect risk attitudes and portfolio choice a key issue is whether any such influences disappear when monetary incentives are present we pursue a systematic experimental comparison of three of the most prominent behavioral phenomena documented in the literature the illusion of control langer 1975 is concerned with greater confidence in one s predictive ability or in a favorable outcome when one has a higher degree of personal involvement even when one s involvement is not actually relevant ambiguity aversion ellsberg 1961 is the desire to avoid unclear circumstances even when this will not increase the expected utility myopic loss aversion benartzi and thaler 1995 combines loss aversion kahneman and tversky 1979 tversky and kahneman 1992 and a tendency to evaluate outcomes frequently this combination leads investors to be more willing to invest a greater proportion of their portfolio in risky assets if they evaluate their investments less frequently we show that these phenomena are present with monetary incentives and also investigate whether people are willing to pay money to accommodate such preferences or whether they are closer to the rational model when incentives are present with the procedure we chose the willingness to actually pa for such preferences depends on the preference the great majority of investors pay for less ambiguity or more frequent feedback investment opportunities but fewer than 10 pay to roll a determinative die themselves 2 we then examine how the preferences between lotteries in the different treatments affect portfolio choice we have participants allocate their investment capital between an asset with a sure return and a risky asset with a higher expected rate of return in fact there is very little variation in investment behavior across any of the illusion of control or ambiguity aversion treatments in contrast the results found in previous experimental studies of myopic loss aversion suggest that participants invest less in their preferred option the main conclusion we draw from these findings is that the relation between which procedure or lottery people prefer and how much they are willing to actually invest in this lottery is not trivial at all people are generally unwilling to pay even small amounts of money to indulge the illusion of control and it does not influence their portfolio choice people are generally willing to pay money for less ambiguity but having less ambiguity does not influence their portfolio choice finally in some cases people are willing to pay money for more frequent feedback and opportunities to change their portfolio but again previous studies have shown that people invest less with this additional information and greater flexibility

diversification in parametric rational expectations economies abstract it is shown that in large parametric rational expectations models even when investors receive private signals about different subsets of assets all investors hold diversified portfolios

mental accounting in portfolio choice evidence from a flypaper effect this paper documents a lack of coordination between the asset allocations of different financial accounts in a household portfolio our findings are predicted by the theory of mental accounting richard h thaler 1985 1990 1999 agents sometimes make decisions about individual accounts in their portfolio without considering their other accounts the setting for our analysis is a large u s firm when an employee at this firm makes a 401 k contribution the company makes a matching contribution proportional to the employee s contribution up to a match threshold in march 2003 the firm changed its 401 k matching rules creating a natural experiment both before and after the rule change the initial allocation of participants own contribution flows was determined by the participants 1 the change in march 2003 was to the policy determining the initial asset allocation of the employer match contributions in the first regime before march 2003 the firm directed matching contribution flows entirely into employer stock this was not a binding restriction as participants could freely reallocate their match balances after matching contributions were made although in practice participants rarely did so in march 2003 the company changed its match policy requiring new enrollees to actively choose the asset allocation for both their own and match contribution flows the change between these regimes was economically neutral any allocation of balances in one regime could be replicated in the other nevertheless allocations to employer stock differed vastly across the two regimes employees who enrolled in february 2003 just before the regime change allocated 23 of their own contribution flows to employer stock since all of their match contributions were directed into employer stock this resulted in a 56 total 401 k allocation to employer stock combining the own contribution and match contribution accounts few of these february enrollees made subsequent trades to reduce their employer stock balances in either account employees who enrolled in march 2003 right after the change allocated 23 of their total own plus match contribution flows to employer stock notice that own contribution allocations to employer stock in the first regime precisely match the combined allocation of own and match contributions in the second regime 23 in both cases even though combined allocations differ greatly across the regimes these results imply that each dollar of employer stock contributed to enrollees through the match in the first regime increased the employees total holdings of employer stock by a full dollar rather than being offset by reduced employer stock holdings elsewhere or being sold off directly in other words money sticks where it hits a phrase attributed to arthur okun generating an asset allocation flypaper effect that is akin to the flypaper effects of public finance corporate finance and intra household consumption 2 after considering several explanations for the asset allocation flypaper effect we conclude that it is due in part to mental accounting our results can be explained by the following simple model in the first regime new enrollees actively allocated only their own contribution flows effectively ignoring the fact that their matching contributions were entirely directed into employer stock in the second regime the match allocation became salient because new enrollees were required to choose both their match and own contribution allocations during the enrollment process this caused enrollees to consider their entire 401 k portfolio instead of just their own contribution accounts as a result the fraction of total contributions allocated to employer stock under the second regime equaled the fraction of own contribution flows allocated to employer stock under the first regime the average participant allocated roughly one quarter of assets to employer stock in whatever accounts were salient whether the set of salient accounts was narrow regime one or broad regime two the dependence of portfolio outcomes on account salience is inconsistent with investors having a clear target asset allocation for their entire portfolio which they efficiently implement through their investment choices in accordance with much prior research we also find that investors are quite passive rarely reallocating their portfolios 3 however our central finding concerns asset allocation decisions made at enrollment a point when people have overcome their passivity and are taking action investor passivity thus cannot account for the unresponsiveness of own contribution allocations to the match allocation at enrollment under the first regime although passivity helps explain why these initial decisions are rarely reversed subsequently

until the bitter end on prospect theory in a dynamic context many economic and financial decisions depend crucially on their timing people decide when to invest in a project when to liquidate assets or when to stop gambling in a casino we provide a general result on prospect theory decision makers who are unaware of the time inconsistency induced by probability weighting if a market offers a sufficiently rich set of investment strategies then such naive investors postpone their stopping decisions indefinitely we illustrate the drastic consequences of this never stopping result and conclude that probability distortion in combination with naivete leads to unrealistic predictions for a wide range of dynamic setups

the gender effect in risky asset holdings abstract we study the relation between gender and stock holdings in finland a particularly gender equal country we show that it is crucial to control for risk aversion using a measure of subjective risk taking rather than measures derived from abstract gambles controls related to financial knowledge and resources also explain the gender difference the residual effect of the male gender on the conditional equity share after all appropriate controls is 3 percentage points and statistically significant the effect on stock market participation on the other hand is close to zero or negative so men contribute more to the nonparticipation puzzle conditional on covariates the gender difference mainly works through women s higher risk aversion which we find extends to finance professionals and wealthy private banking customers

narrow bracketing and dominated choices an experiment by tversky and kahneman 1981 illustrates that people s tendency to evaluate risky decisions separately can lead them to choose combinations of choices that are first order stochastically dominated by other available combinations we investigate the generality of this effect both theoretically and experimentally we show that for any decisionmaker who does not have constant absolute risk averse preferences and who evaluates her decisions one by one there exists a simple pair of independent binary decisions where the decisionmaker will make a dominated combination of choices we also characterize as a function of a person s preferences the amount of money that she can lose due to a single mistake of this kind the theory is accompanied by both a real stakes laboratory experiment and a large sample survey from the general u s population replicating tversky and kahneman s original experiment where decisionmakers with prototypical prospect theory preferences will choose a dominated combination we find that 28 of the participants do so in the survey we ask the respondents about several hypothetical large stakes choices and find higher proportions of dominated choice combinations a statistical model that estimates preferences from the survey results is best fit by assuming people have utility functions that are close to prospect theory value functions and that about 83 of people bracket narrowly none of these results varies strongly with the personal characteristics of participants we also demonstrate directly that dominated choices are driven by narrow bracketing when we eliminate the possibility of narrow bracketing by using a combined presentation of the decisions the dominated choices are eliminated in the laboratory experiment and are greatly reduced in the survey

viable allocations of information in financial markets abstract we study in the context of a financial market allocations of information that are consistent with endogenous information acquisition we focus on whether information is concentrated within a fraction of the market or is diffuse the aggregation of information in prices tends to make signals more complementary than they would be if considered in isolation favoring concentration of information however the ability to use some signals together with prices to predict other signals may increase the degree of substitutability among signals we present conditions under which each of these effects is particularly strong

the disposition effect in securities trading an experimental analysis the disposition effect is the tendency to sell assets that have gained value winners and keep assets that have lost value losers disposition effects can be explained by the two features of prospect theory the idea that people value gains and losses relative to a reference point the initial purchase price of shares and the tendency to seek risk when faced with possible losses and avoid risk when a certain gain is possible our experiments were designed to see if subjects would exhibit disposition effects subjects bought and sold shares in six risky assets asset prices fluctuated in each period contrary to bayesian optimization subjects did tend to sell winners and keep losers when the shares were automatically sold after each period the disposition effect was greatly reduced

a model of casino gambling we show that prospect theory offers a rich theory of casino gambling one that captures several features of actual gambling behavior first we demonstrate that for a wide range of preference parameter values a prospect theory agent would be willing to gamble in a casino even if the casino offers only bets with no skewness and with zero or negative expected value second we show that the probability weighting embedded in prospect theory leads to a plausible time inconsistency at the moment he enters a casino the agent plans to follow one particular gambling strategy but after he starts playing he wants to switch to a different strategy the model therefore predicts heterogeneity in gambling behavior how a gambler behaves depends on whether he is aware of the time inconsistency and if he is aware of it on whether he can commit in advance to his initial plan of action this paper was accepted by brad barber teck ho and terrance odean special issue editors

reference dependent consumption plans we develop a rational dynamic model in which people are loss averse over changes in beliefs about present and future consumption because changes in wealth are news about future consumption preferences over money are reference dependent if news resonates more when about imminent consump tion than when about future consumption a decision maker might to generate pleasant surprises overconsume early relative to the optimal committed plan increase immediate consumption following surprise wealth increases and delay decreasing consumption following surprise losses since higher wealth mitigates the effect of bad news people exhibit an unambiguous first order precautionary savings motive

prior consequences and subsequent risk taking new field evidence from the taiwan futures exchange we use a data set from market participants in the taiwan stock exchange capitalization weighted stock index options markets to demonstrate a strong positive relationship between prior trading outcomes and subsequent risk taking in particular investors in this market take above average risks in afternoon trading after morning gains the phenomenon is prevalent in all three types of market makers accounts and across different types of market participants our findings are consistent with the argument that prior outcomes affect subsequent risk taking through a relationship that is sensitive to the model parameters i e expected return trading period and curvature of the value function because prospect theory can predict both increased and decreased levels of subsequent risk taking we provide possible explanations behind the phenomenon and discuss reasons for the variety of findings in the existing literature