History-dependent risk preferences : evidence from individual choices and implications for the disposition effect

Angie Andrikogiannopoulou; Filippos Papakonstantinou

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

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Alternative title:	State-dependent risk preferences : evidence from individual choices and applications in investment behavior
Year of publication:	2015 ; June 2015
Authors:	Andrikogiannopoulou, Angie ; Papakonstantinou, Filippos
Publisher:	Geneva : Swiss Finance Institute
Subject:	Risk Preferences \| State Dependence \| History Dependence \| Heterogeneity \| Prospect Theory \| Disposition Effect \| Prospect theory \| Risikopräferenz \| Risk attitude \| Portfolio-Management \| Portfolio selection \| Experiment \| Anlageverhalten \| Behavioural finance

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