Pavlovian Influences on Repeated Risk-Taking: Theory and Evidence

Abstract

We propose a new model of choice under repeated exposure to gambles. In it, the agent may
come to choose a negative expected value, negative skew gamble, due to a behavioral bias that
has a neurobiological foundation. We run laboratory experiments as a first step in testing the
model, and supplement the experimental findings with suggestive evidence from observational
data. In the process of doing so, we identify a new asset pricing anomaly. The findings bring
novel insights into the motivations underlying investor decisions and the impact of temptation
and self-control in contexts of repeated risk-taking.

Keywords: Decision making under uncertainty, self-control, craving, option pricing, neurofinance

JEL Classification: C91, D87, G41