This Time Is Different: On Similarity and Risk Taking After Experienced Gains and Losses

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