78 Pages Posted: 13 Jun 2016 Last revised: 27 Aug 2019
Date Written: July 22, 2019
People often expose themselves to negative tail risk by taking on losing bets in which randomly-occurring major losses eradicate all previous gains. Why is this? Here I present evidence from a collection of laboratory experiments aimed at testing several plausible causal explanations. All these explanations are falsified except for the proposition that people are greedy and lack self-control. These findings highlight the importance of purely behavioral factors (alongside and independent of cognitive factors) in helping to understand how people respond to tail risk.
Keywords: tail risk, self-control, gambling, negative skewness, neuroeconomics, neurofinance
JEL Classification: C91, D83, D87, G02, G11
Suggested Citation: Suggested Citation