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History-Dependent Risk Preferences: Evidence from Individual Choices and Implications for the Disposition Effect

Angie Andrikogiannopoulou and Filippos Papakonstantinou
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Filippos Papakonstantinou: Imperial College London

No 15-11, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We use trading data from a sports wagering market to estimate individual risk preferences within the prospect-theory paradigm. The experimental-like features of this market greatly facilitate the estimation of risk preferences, while our long panel enables us to study whether preferences vary across individuals and depend on earlier outcomes. Our estimates i) extend support for existing experimental findings --- mild utility curvature, moderate loss aversion, and probability overweighting of extreme outcomes --- to a real market setting that shares similarities with traditional financial markets, ii) reveal that risk attitude is widely heterogeneous and history-dependent, and iii) indicate that prospect theory can better explain the prevalence of the disposition effect than previously thought.

Keywords: Risk Preferences; State Dependence; History Dependence; Heterogeneity; Prospect Theory; Disposition Effect (search for similar items in EconPapers)
JEL-codes: D03 D12 D14 D81 G02 G11 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2015-02, Revised 2015-07
New Economics Papers: this item is included in nep-cbe, nep-evo, nep-exp and nep-upt
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