This Time Is Different: On Similarity and Risk Taking After Experienced Gains and Losses

How do experienced prior loss or gains affect risk-taking? A large literature reports significant but seemingly inconsistent effects of prior outcomes on risk-taking. We resolve these inconsistencies by proposing a similarity based mechanism determining which outcomes are jointly evaluated and state conditions under which we expect no behavioral changes. In line with our theory, we find in a pre-registered experiment, that the less similar a prior decision situation is in task-relevant dimensions, the weaker is the effect of the prior outcomes on the current decision; variation in non-task relevant dimensions will not change the impact of prior outcomes.