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

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  • Angie Andrikogiannopoulou
  • Filippos Papakonstantinou
  • Francesca Cornelli

Abstract

Using trading data from a sports wagering market, we estimate individuals’ dynamic risk preferences within a prospect theory paradigm. This market’s experimental-like features facilitate preference estimation, and our long panel enables us to study whether preferences vary across individuals and depend on earlier outcomes. Our estimates extend support for experimental findings—mild utility curvature, moderate loss aversion, and probability overweighting of extreme outcomes—to a market setting and reveal that preferences are heterogeneous and history dependent. Applying our estimates to a portfolio choice problem, we show prospect theory can better explain the prevalence of the disposition effect than previously thought.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Angie Andrikogiannopoulou & Filippos Papakonstantinou & Francesca Cornelli, 2020. "History-Dependent Risk Preferences: Evidence from Individual Choices and Implications for the Disposition Effect," The Review of Financial Studies, Society for Financial Studies, vol. 33(8), pages 3674-3718.
    • Handle: RePEc:oup:rfinst:v:33:y:2020:i:8:p:3674-3718.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhz127
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    Cited by:

    1. Markus Dertwinkel-Kalt & Johannes Kasinger & Dmitrij Schneider, 2024. "Skewness Preferences: Evidence from Online Poker," CESifo Working Paper Series 10977, CESifo.
    2. Giannikos, Christos I. & Kakolyris, Andreas & Suen, Tin Shan, 2023. "Prospect theory and a manager's decision to trade a blind principal bid basket," Global Finance Journal, Elsevier, vol. 55(C).
    3. Nicholas Barberis & Lawrence J. Jin & Baolian Wang, 2021. "Prospect Theory and Stock Market Anomalies," Journal of Finance, American Finance Association, vol. 76(5), pages 2639-2687, October.
    4. Ballestra, Luca Vincenzo & Guizzardi, Andrea & Mazzucchelli, Lorenzo, 2024. "Integrating narrow and wide framing disposition effect: A novel approach incorporating perceived risk and realized asset performance," Journal of Economic Behavior & Organization, Elsevier, vol. 220(C), pages 422-432.
    5. Andrew Grant & Oh Kang Kwon & Steve Satchell, 2024. "Properties of risk aversion estimated from portfolio weights," Journal of Asset Management, Palgrave Macmillan, vol. 25(5), pages 427-444, September.
    6. Mujcic, Redzo & Powdthavee, Nattavudh, 2022. "How Do Humans Respond to Huge Financial Losses?," IZA Discussion Papers 15536, Institute of Labor Economics (IZA).
    7. Jan Hanousek Jr. & Jan Hanousek & Jakub Mikulka & Jared Williams, 2023. "Early Outcomes and Future Risk-taking: Evidence from a Large Gambling Provider," MENDELU Working Papers in Business and Economics 2023-90, Mendel University in Brno, Faculty of Business and Economics.
    8. Goto, Shingo & Yamada, Toru, 2023. "What drives biased odds in sports betting markets: Bettors’ irrationality and the role of bookmakers," International Review of Economics & Finance, Elsevier, vol. 86(C), pages 252-270.
    9. Jin, Xuejun & Li, Hongze & Yu, Bin & Zheng, Yijing, 2023. "How does the COVID-19 pandemic change the disposition effect in fund investors?," Pacific-Basin Finance Journal, Elsevier, vol. 81(C).
    10. Guo, Jing & He, Xue Dong, 2021. "A new preference model that allows for narrow framing," Journal of Mathematical Economics, Elsevier, vol. 95(C).
    11. Yu, Dian & Gao, Jianjun & Wang, Tongyao, 2022. "Betting market equilibrium with heterogeneous beliefs: A prospect theory-based model," European Journal of Operational Research, Elsevier, vol. 298(1), pages 137-151.
    12. Dertwinkel-Kalt, Markus & Kasinger, Johannes & Schneider, Dmitrij, 2022. "Skewness preferences: Evidence from online poker," SAFE Working Paper Series 351, Leibniz Institute for Financial Research SAFE.
    13. Brettschneider, Julia & Burro, Giovanni & Henderson, Vicky, 2021. "Wide framing disposition effect: An empirical study," Journal of Economic Behavior & Organization, Elsevier, vol. 185(C), pages 330-347.

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