Path Dependence Flashcards
1
Q
House money effect
A
Willingness to take greater risk with money that was recently won. Suggests reduced risk aversion after an initial gain.
2
Q
Break Even Effect
A
An increase in risk taking after a prior loss in an attempt to break even.
3
Q
What are issues with experimental work aimed at gauging risk preferences?
A
- What you find in experiments don’t translate to real life.
- You don’t know the probability of a situation in real life.
- We don’t know the future market.
- Stakes in real life are larger than experiments
- Decision problems are better defined in real life.
4
Q
When low value suitcases are opened, contestants take on more risk. This is…
A
Consistent with house money effect.
5
Q
Path Dependence
A
When a choice depends on past outcomes rather than only the current situation.
