Closing a Mental Account: The Realization Effect for Gains and Losses
Experimental Economics, forthcoming. Preprint version
62 Pages Posted: 17 Jun 2018 Last revised: 18 May 2020
Date Written: April 19, 2019
How do risk attitudes change after experiencing gains or losses? For the case of losses, Imas (2016) shows that subsequent risk-taking behavior depends on whether these losses have been realized or not. After a realized loss, individuals' risk-taking decreases, whereas it increases after an unrealized (paper) loss. He refers to this asymmetry as the realization effect. In this study, we derive theoretical predictions for risk-taking after paper and realized gains, and for investment opportunities with different skewness. We experimentally test these predictions and, at the same time, replicate Imas' original study. Independent of a prior gain or loss, we show that subsequent risk-taking is higher when outcomes remain unrealized. However, we find no evidence of a realization effect for non-positively skewed lotteries. While the first result suggests that the effect is more general, the second result reveals its boundary conditions.
Keywords: Realization Effect, Mental Accounting, House Money Effect, Risk Taking
JEL Classification: D11, D14, D81, G11
Suggested Citation: Suggested Citation