Peter Koudijs and I have a paper that shows how much people change their risk appetite if they almost lost money... and The Economist last week covers it here:
To say fear alters investors’ and lenders’ behaviour seems self-evident. But the study’s attempt to isolate the effect of personal experience on financial decisions (a subject examined in more detail in our sister column, “Free exchange”, this week) is potentially relevant to those learning not only how markets work but how to apply rigour to financial decisions of other kinds. Clearly, it pays to understand the dynamics of the markets in which a business operates—and recognising the impact of factors not necessarily captured by number-crunching is a part of that.
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