WSJ: Are Investors More or Less Willing to Take on Risk After a Big Money Loss?

By SIMON CONSTABLE

After a big financial loss, are people going to be more or less willing to take a big risk?


For years, two seemingly contradictory theories have come down on either side of that question. A new analysis, however, suggests that perhaps there is no contradiction after all. The right answer, this analysis suggests, is: It depends.


To back up, on one side of this debate has been the theory that a previous loss can lead to increased risk taking. “A person who hasn’t made peace with his losses is likely to accept gambles that would be unacceptable to him otherwise,” psychologist Daniel Kahneman, a Nobel laureate, and Amos Tversky wrote in a 1979 paper. Read more here.