Experiment on Loss making and Risk Taking

Risk Taking & Loss Making - behavior

Risk Taking & Loss Making - behavior

No gains without pains”  “Big gains accompany big risks” “A person who risks nothing gets nothing” – google Risk-Taking and you will find 100s of stories and conclusions about risk taking.  We take risk now and then, with different things we have -life, health, money, relations, values etc.

Here’s one interesting experiment done by economists and they found thought-provoking result on how people think about “risk-taking” and make decision in situation where they make loss.

To make it more meaning full – While reading – ask yourself what you would do in below experiment. Decide answer in your mind before reading answer given in experiement results.

Study 1
Two options are given to you:

Option A
Take 500 rupees, put it in your pocket and go home. Money is yours, no question asked.

Option B
Toss a coin, if you win, you take home 1000 rupees. If you loose toss, you get nothing.

Please stop here for 10 seconds – ask yourself which option would you choose.

Alright! have you thought of the option? Cool! now let’s read further.

It is found – most of the people choose Option A. People think – if I am getting 500 rupees for doing nothing, let me just take it. Taking 500 rupees seems like smart thing to do.

What was your answer? keep your answer with you for now.

Now next experiment

Study 2
I invite you to my home for a cup of tea and towards the end of our meeting I give you two options

Option A)
When you leave my house, pay me 500 rupees as cost of tea

Option B)
Let’s toss a coin. If you win – you pay nothing. If you loose – you pay 1000 rupees.

Hold on! Hold on! Think your answer here! Take 10 seconds and decide what option would you choose.

Done? Alright read further:

It’s found that when people are given second experiment they tend to choose Option B. They want to toss. What option did you choose?

Now some explanation of result and relate it to real world situation.

In Study 1, we like assured profit or gain and we will take it, without taking risk.   This behavior is all around us – I have many relatives who choose to put his or her money into a bank account with a low but guaranteed interest rate, rather than into a stock that may have high returns, but also has a chance of becoming worthless.

In Study 2, people strongly prefer risks that might possibly undo their loss. You bought a stock which has gone down 30%. You realise that may be it was not a good trade however you will not take loss on it, now you want to gamble. The pain of making loss is high and you want to avoid it and you do this by taking more risk. In Gujarati there is a saying “Haryo Jugari bamno rame” – a loosing gambler doubles his bet.

Conclusion:
When we make loss, we choose to take more and more risk (Study 2). However if we get some assured gain/profit. We quietly take it.(Study 1)

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