After a Rare Extreme Loss: Experimental Evidence on Young Investors' Risk Allocation

Rare and severe market outcomes may influence subsequent financial decisions even when the objective probabilities of a new choice remain unchanged. However, the literature has not reached a consensus on whether extreme losses lead investors to avoid risk or engage in loss-chasing behavior. This study examines how a rare extreme-loss scenario affects subsequent risk allocation among young investors and whether an explicit reminder of outcome independence attenuates that response. A randomized online vignette experiment assigned 162 eligible investors aged 18–35 to a common-gain condition, an extreme-loss condition, or an extreme-loss-plus-reminder condition. Participants allocated RMB 10,000 of new hypothetical funds between a safe account and a risky asset. OLS models with HC3 robust standard errors estimated pre-specified group contrasts. Relative to the common-gain group, the extreme-loss group allocated 17.4 percentage points less to the risky asset (95% CI [−25.2, −9.5], p < .001; Hedges' g = −0.84). The reminder produced a small and statistically uncertain 3.7-point increase relative to loss alone. The results support immediate cautious carryover within the analyzed sample, but do not identify a unique psychological mechanism or establish that a brief reminder is effective.