 How do humans respond to large realized losses?Redzo Mujcic and Nattavudh Powdthavee Journal of Economic Psychology, 2025, vol. 107, issue C Abstract: In a controlled field setting, in which the majority of people in our sample lose more than £90,000, we examine how human beings respond to major financial losses. University ethics boards would not allow this kind of huge-loss phenomenon to be studied with normal social-science experiments. Yet the scientific and practical issues at stake are unusually important ones. In the analyzed gameshow setting, individuals are handed £100,000 in cash. They then have to make risky decisions. Facing a sequence of seven questions, individuals are required to distribute their cash endowment over a set of possible answers. Participants lose any cash placed on a wrong answer. In a sample of British participants, we find that people become increasingly more cautious as they lose more of their cash endowment. A realized prior loss of £75,000 or more increases the propensity to fully diversify by 50 percentage points compared to a prior loss of £25,000. We find a similar cautious response in a smaller sample of US participants when the stakes are raised to $1 million US dollars. Our study appears to be the first to be able to calculate systematically how human beings react to large and unrecoverable financial losses. Keywords: Prior losses; Realized losses; Diversification; Risk taking; Large stakes (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:joepsy:v:107:y:2025:i:c:s0167487025000170 DOI: 10.1016/j.joep.2025.102805 Access Statistics for this article Journal of Economic Psychology is currently edited by G. Antonides and D. Read More articles in Journal of Economic Psychology from Elsevier |
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