History-dependent risk preferences : evidence from individual choices and implications for the disposition effect

Using trading data from a sports-wagering market, we estimate individuals' dynamic risk preferences within the prospect-theory paradigm. This market's experimental-like features facilitate preference estimation, and our long panel enables us to study whether preferences vary across individuals and depend on earlier outcomes. Our estimates extend support for experimental findings — mild utility curvature, moderate loss aversion, and probability overweighting of extreme outcomes — to a market setting and reveal that preferences are heterogeneous and history-dependent. Applying our estimates to a portfolio choice problem, we show prospect theory can better explain the prevalence of the disposition effect than previously thought