Question

After losses, the snake-bit effect (whereby people are less likely to take on risk), and the break-even effect (whereby people are more likely to take on risk) operate in opposite directions. The latter seems to usually dominate. Discuss, why it happened?

Answer 1

According to the house money effect we will be looking that investors who have lost or made money after interacting with the market will be likely to take the risk again because they feel that they have made the money once so they will be familiar with the market and they will be liking to make the money again so they will be having a lower fear of the risk.

The break-even effect will reflect that investor is trying to break even in order to make his money to compensate for his loss, so he will be trying to break even and he will not be looking for Risk aversion according to snake bit effect because snake bit effect will be reflecting the risk of the this happens due to revenge trading and the liking of the investor to make money from the market as he feels that he can make the money, the way he has lost it.

hence according to the theory of break even analysis the investor will always be wanting to break even his loss from the market itself and he will be likely to take more risks in order to recover those laws and has breakeven effect will be dominating.