On Taking a Skewed Risk More Than Once

39 Pages Posted: 8 Jan 2021

See all articles by Sebastian Ebert

Sebastian Ebert

Frankfurt School of Finance & Management; Frankfurt School of Finance & Management

Date Written: November 16, 2020

Abstract

This paper collects results on the repeated risk-taking of skewed risks. An extensive body of theoretical and experimental literature has shown that, in one-time decision situations, humans are skewness-seeking and dislike risks that feature unlikely but large losses (i.e., negatively skewed risks). We show that, contrary to intuition, the often-observed phenomenon of penny-picking—repeatedly taking negatively skewed risks—is not at odds with skewness-seeking, but, to the contrary, may even be caused by it. The skewness of the distribution that results from repeatedly taking a skewed risk depends in non-trivial ways on the risk-taking strategy and may even differ in sign from that of the individual risk. With sufficient time available, every risk—no matter how negatively skewed—can be gambled in such a way that, in total, skewness is positive. Because recent work has shown that skewness is decisive whether risk is taken, this result may be important for economics and finance on a fundamental level.

Keywords: penny-picking, repeated risk-taking, skewness, skewness preference, trailing stop-loss

JEL Classification: D03, D81, G11

Suggested Citation

Ebert, Sebastian and Ebert, Sebastian, On Taking a Skewed Risk More Than Once (November 16, 2020). Available at SSRN: https://ssrn.com/abstract=3731565 or http://dx.doi.org/10.2139/ssrn.3731565

Sebastian Ebert (Contact Author)

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt, 60322
Germany

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt, 60322
Germany

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