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Closing a mental account: the realization effect for gains and losses

Christoph Merkle (), Jan Müller-Dethard () and Martin Weber
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Christoph Merkle: Aarhus University BSS
Jan Müller-Dethard: University of Mannheim

Experimental Economics, 2021, vol. 24, issue 1, No 12, 303-329

Abstract: Abstract How do risk attitudes change after experiencing gains or losses? For the case of losses, Imas (Am Econ Rev 106:2086–2109, 2016) shows that subsequent risk-taking behavior depends on whether these losses have been realized or not. After a realized loss, individuals’ risk-taking decreases, whereas it increases after an unrealized (paper) loss. He refers to this asymmetry as the realization effect. In this study, we derive theoretical predictions for risk-taking after paper and realized gains, and for investment opportunities with different skewness. We experimentally test these predictions and, at the same time, replicate Imas’ original study. Independent of a prior gain or loss, we show that subsequent risk-taking is higher when outcomes remain unrealized. However, we find no evidence of a realization effect for non-positively skewed lotteries. While the first result suggests that the effect is more general, the second result reveals its boundary conditions.

Keywords: Realization effect; Mental accounting; House money effect; Risk-taking; D11; D14; D81; G11 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s10683-020-09663-x

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