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Time-varying risk behavior and prior investment outcomes: Evidence from Italy

Andrea Lippi, Laura Barbieri (), Mariacristina Piva () and Werner De Bondt

Judgment and Decision Making, 2018, vol. 13, issue 5, 471-483

Abstract: Risk behavior can be capricious and may vary from month to month. We study 62 clients of a private bank in Northern Italy. The individuals are of special interest for several reasons. As active traders, they manage the value-at-risk (VaR) of a portion of their wealth portfolios. In addition, they act alone, i.e., without input from a financial adviser. Based on VaR-statistics, we find that, in general, the subjects become more risk-averse after suffering losses and more risk-seeking after experiencing gains. The monthly gains and losses that alter investor risk behavior represent true changes in wealth but are ``on paper'' only, i.e., not immediately realized. Our results allow several interpretations, but they are not at odds with a house money effect, or the possibility that overconfident investors trade on illusions. Rapidly shifting risk behavior in fast response to unstable circumstances weakens individual risk tolerance as a deep parameter and key construct of finance theory.

Keywords: risk attitude; gains perception; losses perception; decision making (search for similar items in EconPapers)
Date: 2018
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