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How Do Prior Gains and Losses Affect Subsequent Risk Taking? New Evidence from Individual-Level Horse Race Bets

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  • Niko Suhonen

    (University of Eastern Finland Business School, FI-80101 Joensuu, Finland)

  • Jani Saastamoinen

    (University of Eastern Finland Business School, FI-80101 Joensuu, Finland)

Abstract

Many empirical studies focusing on how prior outcomes affect subsequent risk taking report conclusions that appear mutually contradictory. While some studies document increased risk taking after gains and risk aversion after losses, others report the opposite. This paper contributes to this literature by investigating horse race bettors’ sequential risky decisions using individual-level data. A horse race betting market is a laboratory-like environment and can be used to analyze behavioral patterns associated with decision making under risk. We find evidence for (i) the “house money effect” as bettors take riskier wagers after gains and mostly spend the money they have won; (ii) risk aversion after prior losses, which we label a “playing safe effect”; and (iii) a preference for breakeven. Contrary to the widely held conception in the empirical literature, our findings suggest that the “break-even effect” does not necessarily imply an increased preference for riskier bets because bettors may seek to break even with less risky wagers.

Suggested Citation

  • Niko Suhonen & Jani Saastamoinen, 2018. "How Do Prior Gains and Losses Affect Subsequent Risk Taking? New Evidence from Individual-Level Horse Race Bets," Management Science, INFORMS, vol. 64(6), pages 2797-2808, June.
  • Handle: RePEc:inm:ormnsc:v:64:y:2018:i:6:p:2797-2808
    DOI: 10.287/mnsc.2016.2679
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    3. Christoph Merkle & Jan Müller-Dethard & Martin Weber, 2021. "Closing a mental account: the realization effect for gains and losses," Experimental Economics, Springer;Economic Science Association, vol. 24(1), pages 303-329, March.
    4. Levi Perez, 2018. "Introduction - Gambling economics and management: some insights into recent developments in gambling-related research," Economics and Business Letters, Oviedo University Press, vol. 7(4), pages 126-128.
    5. Schneider, Julian & Oehler, Andreas, 2021. "Competition for visibility: When do (FX) signal providers employ lotteries?," International Review of Financial Analysis, Elsevier, vol. 78(C).
    6. Marius Ötting & Christian Deutscher & Carl Singleton & Luca De Angelis, 2023. "Gambling on Momentum in Contests," Economics Discussion Papers em-dp2023-08, Department of Economics, University of Reading.
    7. Jani Saastamoinen & Niko Suhonen, 2018. "Does betting experience matter in sequential risk taking in horse race wagering?," Economics and Business Letters, Oviedo University Press, vol. 7(4), pages 137-143.
    8. Cheng, Teng Yuan & Lee, Chun I. & Lin, Chao Hsien, 2020. "The effect of risk-taking behavior on profitability: Evidence from futures market," Economic Modelling, Elsevier, vol. 86(C), pages 19-38.
    9. Mujcic, Redzo & Powdthavee, Nattavudh, 2022. "How Do Humans Respond to Huge Financial Losses?," IZA Discussion Papers 15536, Institute of Labor Economics (IZA).
    10. Yansong Li & Zhenliang Liu & Yuqian Wang & Edmund Derrington & Frederic Moisan & Jean-Claude Dreher, 2023. "Spillover effects of competition outcome on future risky cooperation," Post-Print hal-04325682, HAL.

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