Risk-Taking Behavior During Downturn : Evidence of Loss-Chasing and Realization Effect in the Cryptocurrency Market

This paper examines risk-taking behavior of cryptocurrency traders in Thailand. We find that, on average, people engage in loss-chasing behavior, taking on more risk after paper loss hoping to recover their investment. Although the literature has documented this loss-chasing behavior in casino gambling, we are the first to reveal this behavior in cryptocurrency market. An increase in paper loss by one standard deviation would raise risk-taking by 13.79%. The loss-chasing behavior is more severe for high-risk individuals and during downturn. In the most extreme case, one-standard-deviation increase in paper loss would increase risk-taking by 48.99%. Our study also adds new insights for the realization effect literature as we take individual’s risk-aversion level into consideration. We find some evidence of realization effect for low-risk individuals. Our study is useful for monitoring and policy recommendations as loss-chasing behavior may result in people irrationally taking on more risk than what they can afford