Showing papers on "Loss aversion published in 1998"
TL;DR: In this article, the authors argue that the extent to which potential traders are susceptible to the endowment effect is related to the comparability of the to be traded goods, and they test this hypothesis in an experimental market in which participants endowed with a bottle of wine were offered the opportunity to trade their wine for another wine.
76 citations
TL;DR: In this article, the authors investigated whether reluctance to trade declines when the trade involves less of a loss, specifically, when one item is traded for another very similar item, and they found that the willingness to trade decreased as the similarity between the endowment and the alternative increased.
Abstract: Previous research has shown that after decision makers are endowed with an object, they are reluctant to trade it for an alternative item. This endowment effect can be explained by loss aversion, the tendency to weight losses more heavily than gains. Consequently, there is no reluctance to trade when no true loss is involved. Four studies investigated whether reluctance to trade declines when the trade involves less of a loss—specifically, when one item is traded for another very similar item. Three experiments did not reveal a relation between willingness to trade and the similarity between the two items being traded. A fourth experiment, however, indicated that subjects were quite willing to trade for an identical item, less willing to trade for a similar item, and even less willing to trade for a dissimilar item. Thus, reluctance to trade decreased as the similarity between the endowment and the alternative increased. This result suggests that loss aversion is a function not only of the item being lost but also of the trade itself—that is, of the relation between the two items being traded. © 1998 John Wiley & Sons, Ltd.
65 citations
TL;DR: This paper showed that the concavity of the marginal utility continues to determine precautionary saving, but its effect is of a second order magnitude (proportional to the square of the coefficient of variation) compared to the first order effect induced by loss aversion, and that a stabilization fund that is rather small when agents are maximizing the conventional expected utility, turns out to be rather large with loss aversion.
42 citations
TL;DR: Configural weighting provides a better account of buying and selling prices than either of two models of loss aversion or the theory of anchoring and insufficient adjustment.
41 citations
TL;DR: In this article, it was shown that under assumptions of Prospect Theory, conditions for cooperation are best if dilemmas include both positive and negative outcomes, and that these conditions improve with increasing loss aversion.
Abstract: Raub and Snijders (1997) show that, under the assumption of S‐shaped utility, conditions for cooperation in social dilemmas are more restrictive if outcomes represent losses than if outcomes represent gains. They neglected two interesting issues in their paper: conditions for cooperation in social dilemmas with both losses and gains as outcomes, and the effect of probability weighing on these conditions. In this paper it is shown that, under assumptions of Prospect Theory, conditions for cooperation are best if dilemmas include both positive and negative outcomes, and that these conditions improve with increasing loss aversion. Furthermore, it is shown that probability weighing can effect conditions to cooperate as well.
12 citations
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TL;DR: In this article, the authors examine an evolutionary model of bargaining behavior in a society where resources are finite and show that successful agents exhibit loss aversion and an "endowment effect" when information is symmetric.
Abstract: We examine an evolutionary model of bargaining behavior in a society where resources are finite. Agents who develop better strategies for bargaining and trading come to dominate the population. We show that successful agents exhibit loss aversion and an "endowment effect." When information is symmetric, a norm of equity is evolutionarily stable and efficient. In this case, disagreement arises when there is uncertainty concerning the gains to trade. The social institution of private property may emerge spontaneously when information concerning individual endowments is private. As in the symmetric information case, disagreement (or inefficiencies) arise when there is uncertainty over the gains from trade.
7 citations
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TL;DR: In this article, the authors characterize the equilibria of infinitely repeated games for the case of extreme loss aversion, and show how these are related to the equilibrium of stochastic games with state-independent transitions.
Abstract: The Nash equilibrium solution concept for strategic form games is based on the assumption of expected utility maximization. Reference dependent utility functions (in which utility is determined not only by an outcome, but also by the relationship of the outcome to a reference point) are a better predictor of behavior than expected utility. In a repeated situation, the value of the previous payoff is a natural reference point for evaluating each period's payoff, and loss aversion implies that decreases are treated more severely than increases. We characterize the equilibria of infinitely repeated games for the case of extreme loss aversion, and show how these are related to the equilibria of stochastic games with state-independent transitions.
3 citations
TL;DR: In this paper, the authors explore a composite metric of asymmetric risk and find that non-linearity in the covariation of stock returns with bullish and bearish states of the market carries a significant price.
Abstract: Many financial decision-makers seem to regard risk as the variability of returns below some pre-specified target and treat above-target variability as a sweetener. The disutility from losses also appears to be larger than the utility from gains. Using some simple metrics of downside bearishness and upside bullishness constructed from semivariances, this paper tests for the empirical content of this asymmetry. Some of these simple metrics are priced in the U.S. stock market. In particular, exploring a composite metric of asymmetric risk reveals that non-linearity in the covariation of stock returns with bullish and bearish states of the market carries a significant price. Also, market premium for bearishness is larger in magnitude than that for bullishness, lending support to the existence of loss aversion in the aggregate. While small-cap stocks tend to be more bearish than bullish, the asymmetric risk effect is not spuriously driven by the size effect. Finally, some results consistent with an aymmetric-risk-based explanation for the puzzles of return momentum and reversal are presented.
2 citations
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TL;DR: In this article, the authors focus on linear/exponential, power and multilinear utility for decision models under uncertainty, and show that constant absolute (proportional) risk aversion implies linear or exponential (power) utility.
Abstract: In cumulative prospect theory models, different behavior concerning gains and losses is per-mitted. For gains different decision weights are assigned than for losses, and the shape of utility can reveal loss aversion. Decision analyses concentrate on both, the capacities, which determine the decision weights, and the nature of utility. This paper focuses on linear/exponential, power and multilinear utility for decision models under uncertainty. Simple preference axioms are for-mulated for a representation by a cumulative prospect theory function. All models share the following axioms: weak ordering, continuity, monotonicity and tail independence. We first show that in their presence constant absolute (proportional) risk aversion implies linear/exponential (power) utility. Then, in the multiattribute case, considering (mutual) utility independence, it is shown that the utility function is (additive/multiplicative) multilinear.
1 citations
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TL;DR: A volume of recent experimental evidence suggests that individual preferences may not be independent of the consumer's vantage point as mentioned in this paper, and that agents may suffer from loss aversion (also known as the endowment effect and status quo bias).
Abstract: A volume of recent experimental evidence suggests that individual preferences may not be independent of the consumer's vantage point. In particular agents may suffer from loss aversion (also known as the endowment effect and status quo bias). Allocations which appear desirable ex ante may therefore not be so ex post which poses considerable problems for the traditional propositions of welfare economics.
1 citations
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TL;DR: In this article, the authors explore a composite metric of asymmetric risk and find that non-linearity in the covariation of stock returns with bullish and bearish states of the market carries a significant price.
Abstract: Many financial decision-makers seem to regard risk as the variability of returns below some pre-specified target and treat above-target variability as a sweetener. The disutility from losses also appears to be larger than the utility from gains. Using some simple metrics of downside bearishness and upside bullishness constructed from semivariances, this paper tests for the empirical content of this asymmetry. Some of these simple metrics are priced in the U.S. stock market. In particular, exploring a composite metric of asymmetric risk reveals that non-linearity in the covariation of stock returns with bullish and bearish states of the market carries a significant price. Also, market premium for bearishness is larger in magnitude than that for bullishness, lending support to the existence of loss aversion in the aggregate. While small-cap stocks tend to be more bearish than bullish, the asymmetric risk effect is not spuriously driven by the size effect. Finally, some results consistent with an aymmetric-risk-based explanation for the puzzles of return momentum and reversal are presented.
01 Jan 1998
TL;DR: The belief that people will find ways to exploit gains from trade is central to much of economics as discussed by the authors, and the belief that unwillingness to trade should be seen as direct evidence that benefits from trade are absent.
Abstract: The belief that people will find ways to exploit gains from trade is central to much of economics. Some authors (e.g. Becker, Landes and Michael, 1977; McLaughlin, 1991) argue that unwillingness to trade should be seen as direct evidence that gains from trade are absent. The issue also arises in the right to manage-efficient contracts debate (e.g. Oswald, 1993), and in the difficulty economic theory has in accounting for thework stoppages and other destructive acts that sometimes accompanyunion-firm bargaining.