Would you bet against a favorite?

Research by Carey Morewedge indicates why you might not.

It’s tough being on the losing side. But imagine protecting yourself from the misery of the loss by betting against your favorite side. That way, even if your favorite side loses, the loss is compensated to a certain degree. This practice is called hedging and is a common exercise in financial decisions. In an opinion piece for New York Times Questrom professor Carey Morewedge writes -“Logic strongly recommends this kind of emotional hedge. Consider that for most people, losing something hurts more than gaining that same thing feels good — a phenomenon known as loss aversion.”

But, recent studies by Morewedge and his colleagues demonstrate that people are reluctant to bet against the side they support. In multiple studies conducted by the researchers, participants turned down hedges but chose to support their favorite side, even at high stakes.

What explains this reluctance? The researchers identified that people are reluctant to hedge because it feels disloyal. If bets are unrelated to people’s identities, they are happy to accept them.

These results are insightful about people’s financial decisions. For example, if employees who receive company stock options hold too much in their portfolio, they could be at a risk if the company goes bankrupt.Such reluctance to sell company stock may stem in part from an aversion to disloyalty” writes Morewedge.

Read the article and Carey Morewedge’s opinion on why it could be wise to hedge in the New York Times

View the research paper in the journal of Management Science.

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