This Time Is Different: On Similarity and Risk Taking After Experienced Gains and Losses
43 Pages Posted: 24 Nov 2020 Last revised: 1 Jun 2021
Date Written: May 31, 2021
Abstract
How do past experiences of losses or gains affect risk taking? Research shows inconsistent effects of prior outcomes on risk taking. To resolve these inconsistencies we propose a similarity-based theory of how past outcomes could affect decisions: Only past situations similar to the current situation affect decisions. Consistent with the similarity theory, the results of a preregistered experiment show that the less similar a prior decision situation is on task-relevant dimensions, the weaker its effect on the current decision. In sum, incorporating similarity into decision-making theory provides a cognitively based explanation of how past experiences influence current decisions under risk.
Keywords: similarity, categorization, sequential risk taking, house money, gambling for resurrection, realization effect
JEL Classification: D01, D11, D14, D81, D90, G11
Suggested Citation: Suggested Citation