The Realization Effect: Risk-Taking after Realized versus Paper Losses

Alex Imas

American Economic Review, 2016, vol. 106, issue 8, 2086-2109

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-codes: D11 D14 D81 G11 (search for similar items in EconPapers)
Date: 2016
Note: DOI: 10.1257/aer.20140386
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Citations: View citations in EconPapers (93)

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