How Prior Outcomes Affect Individual Investors' Subsequent Risk Taking

Journal of Personal Finance, 13 (1) 2014, 8-37

45 Pages Posted: 16 Jan 2012 Last revised: 7 Mar 2014

See all articles by Keith Jacks Gamble

Keith Jacks Gamble

Middle Tennessee State University

Bjorn Johnson

DePaul University - College of Commerce

Abstract

We present empirical evidence of how prior outcomes affect individual investors’ subsequent risk taking. Investors who experience big gains or big losses are likely to exit the stock market; however, investors remaining in the market increase their portfolio risk taking following losses. They replace stocks sold with new positions of a higher (lower) value following recent losses (gains), thereby leading to an increase (decrease) in overall stock portfolio risk taking. Our results are consistent with the predictions of consumption habit formation interacting with the disposition effect. Our results cannot be explained by information, simple rebalancing, the house money effect, or the break even effect.

Keywords: risk taking, house money effect, break even effect, retail investors, individual investors, disposition effect

JEL Classification: G11

Suggested Citation

Gamble, Keith Jacks and Johnson, Bjorn, How Prior Outcomes Affect Individual Investors' Subsequent Risk Taking. Journal of Personal Finance, 13 (1) 2014, 8-37, Available at SSRN: https://ssrn.com/abstract=1985620 or http://dx.doi.org/10.2139/ssrn.1985620

Keith Jacks Gamble (Contact Author)

Middle Tennessee State University ( email )

MTSU Box 27
Murfreesboro, TN 37129
United States

Bjorn Johnson

DePaul University - College of Commerce ( email )

Chicago, IL 60604
United States

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