Aversion to a sure loss: Turning investors into gamblers

Abstract

© 2019, UNIVRIJEKA. All rights reserved. In situations where there is a lack of relevant information for proper decision-making, investors tend to be ambiguity-averse, opting for the probabilities with predictable outcomes. In cases where investors are faced with options without known probabilities, they tend to choose an option that will guarantee the most negligible loss. When faced with a diminutive loss, the investors will try to avoid these losses, even if that means exposing more resources to potential losses. Average down investment strategy can help to overcome losses faster while risking large amounts of resources, thus, showing investors’ propensity for loss-aversion. However, stock trading under ambiguity is not rational behavior, and is closer to gambling than investing, even when faced with losses. The choice of average down as investment strategy can explain the effect that dominates during investment decision-making process when losses occur due to ambiguity. This paper presents the results of a research conducted in order to determine if investors will use average down strategy when there is a lack of information on the market, and the size of the loss when they will be willing to use it. Obtained results show strong probability of average down usage among the subject group, thus proving aversion to a sure loss. The relation between risk aversion and aversion to a sure loss is tested. The results show that there is no influence of risk aversion on choice to use average down investment strategy. The results and possible applications of the research are thoroughly discussed.