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19 April 2023
20231681862400000
No. 206

Risk-Taking Behavior during Downturn: Evidence of Loss-Chasing and Realization Effect in the Cryptocurrency Market

Abstract

Psychologists and economists have both explored how past outcomes influence subsequent risktaking behavior. However, psychologists traditionally focused on gambling, while economists mainly looked at investors’ decisions under uncertainty. As a result, the two fields arrived at different conclusions. Psychology literature identified loss-chasing behavior among casino gamblers and labeled it “compulsive gambling,” a disorder requiring treatment. Economists, on the other hand, introduced a concept of the “realization effect,” suggesting that risk-taking may increase after an unrealized loss but decrease after a realized loss (Imas, 2016). This paper aims to reconcile these two perspectives using empirical evidence from the cryptocurrency market, where gamblers and investors coexist. We find that high-risk individuals increase risk-taking after both unrealized and realized losses. In the most severe case, a one-standard-deviation increase in loss would raise risk-taking, as measured by portfolio volatility, by 58.72%. Thus, high-risk individuals in the cryptocurrency market behave like casino gamblers observed in Psychology literature. On the other hand, low-risk individuals increase risk-taking only after unrealized losses and avoid risks after realized losses. Thus, low-risk individuals in the cryptocurrency market behave like investors facing risky choices, which can be explained by the “realization effect” in Economics literature.

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JEL: D81G11G41
Tags: cryptocurrencyrealization effectloss-chasingbehavioral finance
The views expressed in this workshop do not necessarily reflect the views of the Puey Ungphakorn Institute for Economic Research or the Bank of Thailand.
Voraprapa Nakavachara
Voraprapa Nakavachara
Chulalongkorn University
Roongkiat Ratanabanchuen
Roongkiat Ratanabanchuen
Chulalongkorn Business School
Kanis Saengchote
Kanis Saengchote
Chulalongkorn University
Thitiphong Amonthumniyom
Thitiphong Amonthumniyom
Securities Exchange and Commission, Thailand
Pongsathon Parinyavuttichai
Pongsathon Parinyavuttichai
The Securities and Exchange Commission, Thailand
Polpatt Vinaibodee
Polpatt Vinaibodee
The Securities and Exchange Commission, Thailand

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