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Unexpected wins can increase risk aversion

13 July 2012

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By Manju Manglani, Editor (@ManjuManglani)

People are more likely to be risk averse after experiencing an unexpected win or loss, an academic study has found.

The research suggests that what affects short-term risk aversion is not whether a case is won or lost, but whether the outcome was expected. Participants appeared to decrease their risk-taking levels after experiencing a surprising outcome – even a positive one.

“Surprising events are known to cause animals to stop, freeze, orient to the surprising stimulus and update their schemas of how the world works,” said Heath Demaree, professor of psychology at Case Western Reserve University.

“Our recent research suggests that surprising events also cause people to temporarily reduce risk-taking.”

Previous studies have shown that a person’s risk-taking preferences may change as a result of the preceding trial (win or loss). For example, the ‘house money effect’ suggests that risk taking may increase after a win, while the ‘break even effect’ posits that risk taking increases after a loss.

Past research has also found that a person’s emotional state influences risk taking: positive moods decrease risk taking and negative moods increase risk taking.

Because winning and losing may influence one’s emotional state, the study sought to investigate how both previous outcomes and a person’s emotional response to those outcomes independently influence subsequent risk taking.

With a fictitious bankroll of $50, participants played one or two of three types of computerised slot games 25 times each. Each computerised game produced wins at different probabilities: 13 per cent, 50 per cent, and 87 per cent.

Fifty-nine participants played the high-risk computerised gambling game (13 per cent) and were given some surprise big wins. A separate group of 85 participants played both the 50 per cent and 85 per cent win yield. The last group, which expected to mostly win, was given some unexpected losses.

“Each game was set to be a ‘fair’ game,” said Demaree. “That is, if you played for a long period of time, you should break even on average.”

Although no participants gambled with real money, motivation to win was present. For every dollar in the individual’s account at the end of playing the 25 games, the person received one ticket towards a $50 raffle.

After playing each game, participants answered a questionnaire about emotions, moods and risk taking.

The full findings of the research by Demaree et al are published in “Risk dishabituation: In repeated gambling, risk is reduced following low-probability ‘surprising’ events (wins or losses)” in the American Psychological Association journal Emotion.

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Risk & Compliance