This Time Is Different: On Similarity and Risk Taking After Experienced Gains and Losses
43 Pages Posted: 24 Nov 2020 Last revised: 1 Jun 2021
Date Written: May 31, 2021
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
Suggested Citation: Suggested Citation