History-Dependent Risk Preferences: Evidence from Individual Choices and Implications for the Disposition Effect

摘要

Using trading data from a sports wagering market, we estimate individuals' dynamic risk preferences within a prospect theory paradigm. This market's experimental-like features facilitate preference estimation, and our long panel enables us to study whether preferences vary across individuals and depend on earlier outcomes. Our estimates extend support for experimental findings-mild utility curvature, moderate loss aversion, and probability overweighting of extreme outcomes-to a market setting and reveal that preferences are heterogeneous and history dependent. Applying our estimates to a portfolio choice problem, we show prospect theory can better explain the prevalence of the disposition effect than previously thought.