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Showing papers on "Loss aversion published in 1987"


Journal ArticleDOI
TL;DR: In this article, the authors argue that the psychological theory of loss aversion explains the difference between willingness to accept (WTA) and willingness to pay (WTP) measures of value, and demonstrate that individuals who exhibit a large disparity between WTA and WTP are perhaps underperceiving the value of gains or over-perceptively receiving value of losses, are behaving in an irrational manner, and will consequently achieve a lower level of well-being than if they behaved in a true utility maximizing manner.
Abstract: Psychologists have long argued that people are much more averse to a loss than attracted to an equivalent gain. This behavior, termed loss aversion, has been formalized by Kahneman and Tversky [1979] in their reformulation of expected utility theory, prospect theory. In prospect theory the utility function is replaced by a value function that evaluates changes in income from the current level. Increases in income are weighted by a relatively small marginal utility. Decreases in income are weighted by a much larger marginal utility. In effect, the value function implies that a kink in the relationship between utility and income occurs at the initial income or reference point and that the slope of the utility function for losses in income is steeper than it is for gains. In a recent paper Knetsch and Sinden [1984] report a series of experiments that demonstrate the existence of a large disparity between willingness to accept (WTA) and willingness to pay (WTP) measures of value. They argue that the psychological theory of loss aversion explains this difference. Economic theory would suggest that individuals who exhibit a large disparity between WTA and WTP are perhaps underperceiving the value of gains or overperceiving the value of losses, are behaving in an irrational manner, and will consequently achieve a lower level of well-being than if they behaved in a true utility-maximizing manner. This would, in contrast to loss aversion, usually imply near equal values for WTA and WTP (see Willig [1976]). Further documentation of a larger than expected disparity between WTA and WTP has been obtained in surveys asking for the value of a variety of public goods. For example, Cummings, Brookshire, and Schulze [1986] document six

541 citations