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

Angie Andrikogiannopoulou; Filippos Papakonstantinou

doi:10.1093/rfs/hhz127

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

Angie Andrikogiannopoulou, Filippos Papakonstantinou

Banking & Finance

Research output: Contribution to journal › Article › peer-review

10 Citations (Scopus)

236 Downloads (Pure)

Abstract

Using trading data from a sports-wagering market, we estimate individuals' dynamic risk preferences within the 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.

Original language	English
Pages (from-to)	3674–3718
Journal	REVIEW OF FINANCIAL STUDIES
Volume	33
Issue number	8
Early online date	22 Oct 2019
DOIs	https://doi.org/10.1093/rfs/hhz127
Publication status	Published - Aug 2020

Keywords

Risk Preferences
State Dependence
History Dependence
Heterogeneity
Prospect Theory
Disposition Effect

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10.1093/rfs/hhz127

History-Dependent Risk Preferences_ANDRIKOGIANNOPOULOU_Publishedonline22October2019_GREEN AAMAccepted author manuscript, 1.94 MB

https://www.filippospapakonstantinou.com/StateDependentPreferences.pdf

Cite this

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

Abstract

Keywords

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