Showing papers on "Loss aversion published in 1992"

Advances in prospect theory: cumulative representation of uncertainty

Abstract: We develop a new version of prospect theory that employs cumulative rather than separable decision weights and extends the theory in several respects. This version, called cumulative prospect theory, applies to uncertain as well as to risky prospects with any number of outcomes, and it allows different weighting functions for gains and for losses. Two principles, diminishing sensitivity and loss aversion, are invoked to explain the characteristic curvature of the value function and the weighting functions. A review of the experimental evidence and the results of a new experiment confirm a distinctive fourfold pattern of risk attitudes: risk aversion for gains and risk seeking for losses of high probability; risk seeking for gains and risk aversion for losses of low probability. Expected utility theory reigned for several decades as the dominant normative and descriptive model of decision making under uncertainty, but it has come under serious question in recent years. There is now general agreement that the theory does not provide an adequate description of individual choice: a substantial body of evidence shows that decision makers systematically violate its basic tenets. Many alternative models have been proposed in response to this empirical challenge (for reviews, see Camerer, 1989; Fishburn, 1988; Machina, 1987). Some time ago we presented a model of choice, called prospect theory, which explained the major violations of expected utility theory in choices between risky prospects with a small number of outcomes (Kahneman and Tversky, 1979; Tversky and Kahneman, 1986). The key elements of this theory are 1) a value function that is concave for gains, convex for losses, and steeper for losses than for gains,

Prospect Theory and International Relations: Theoretical Applications and Analytical Problems

Abstract: In this essay I evaluate the potential contribution of prospect theory to our understanding of international relations. I begin with the implications of loss aversion, the endowment effect, risk orientation, and framing for theoretical questions relating to the stability of the status quo in international politics, deterrence, bargaining, and preventive war. I then raise conceptual and methodological problems which complicate the theoretical and empirical application of prospect theory to international behavior. I illustrate my arguments with references to some recent attempts to use a prospect theory framework to guide case studies of crises decision-making. I conclude that in applying prospect theory to empirical cases, the analyst must demonstrate not only that empirical behavior is consistent with the theory but also that the observed behavior cannot adequately be explained by a rational choice model which posits the maximization of expected value.

Political Implications of Loss Aversion

Abstract: Prospect theory offers powerful insights and propositions into political decisionmaking, especially in international politics. Evidence indicates that statesmen are indeed risk-acceptant for losses. This would help explain observed patterns in bargaining, deterrence, the origins of wars, as well as suggesting why states are less likely to behave aggressively when doing so would produce gains than when such behavior might prevent losses.

Reference Points, Loss Aversion, and Contingent Values for Auto Safety

Abstract: This article is concerned with the possible role of reference points and loss aversion (as suggested by prospect theory) in subjects' judgments about the value of increments and decrements in automobile safety. The contingent valuation method is employed in two experiments, both of which consider subjects' willingness-to-pay (WTP) for increased safety and compensation demanded (CD) for decreased safety in hypothetical new vehicle purchases. The results establish that disparities exist in subjects' WTP and CD values for the same increment of auto safety, even for a close-to-market context such as hypothetical new vehicle purchases. The results also indicate that evaluations can be manipulated by changing the perception of the reference point: losses can be recast as forgone gains and forgone gains as losses, altering (or even eliminating) differences between WTP and CD values.

Prospect Theory and Political Analysis: A Psychological Perspective'

Abstract: Certain difficulties from the point of view of psychological theorizing arise from the application of prospect theory to the analysis of political events. A number of issues, ranging from probability estimation and risk attitudes to the endowment effect and loss aversion, are discussed as they relate to the decision-maker, his or her current position, the values of outcomes, and their probabilities.

Union Contracts and Life Cycle - Permanent Income Hypothesis

Abstract: This paper isolates households in the PSID whose heads can be matched to particular long-term union contracts with high confidence. The author uses use published information on these contracts to construct a household-specific measure of expected wage growth. He finds that predictable wage movements are significantly correlated with consumption changes, contrary to neoclassical consumption theory. The author finds that consumption responds more strongly to predictable income declines than to predictable income increases. This asymmetry is inconsistent with liquidity constraints and myopia but is qualitatively consistent with models in which preferences exhibit loss aversion. Copyright 1995 by American Economic Association. (This abstract was borrowed from another version of this item.)