Showing papers on "Loss aversion published in 2007"
TL;DR: This paper investigated neural correlates of loss aversion while individuals decided whether to accept or reject gambles that offered a 50/50 chance of gaining or losing money, and found that people typically exhibit greater sensitivity to losses than to equivalent gains when making decisions.
Abstract: People typically exhibit greater sensitivity to losses than to equivalent gains when making decisions. We investigated neural correlates of loss aversion while individuals decided whether to accept or reject gambles that offered a 50/50 chance of gaining or losing money. A broad set of areas (including midbrain dopaminergic regions and their targets) showed increasing activity as potential gains increased. Potential losses were represented by decreasing activity in several of these same gain-sensitive areas. Finally, individual differences in behavioral loss aversion were predicted by a measure of neural loss aversion in several regions, including the ventral striatum and prefrontal cortex.
1,531 citations
TL;DR: This paper proposes a general preference-based method and uses it to measure loss aversion in an experimental study without making any parametric assumptions, and is the first to obtain a parameter-free elicitation of prospect theory's utility function on the whole domain.
Abstract: Agrowing body of qualitative evidence shows that loss aversion, a phenomenon formalized in prospect theory, can explain a variety of field and experimental data. Quantifications of loss aversion are, however, hindered by the absence of a general preference-based method to elicit the utility for gains and losses simultaneously. This paper proposes such a method and uses it to measure loss aversion in an experimental study without making any parametric assumptions. Thus, it is the first to obtain a parameter-free elicitation of prospect theory's utility function on the whole domain. Our method also provides an efficient way to elicit utility midpoints, which are important in axiomatizations of utility. Several definitions of loss aversion have been put forward in the literature. According to most definitions we find strong evidence of loss aversion, at both the aggregate and the individual level. The degree of loss aversion varies with the definition used, which underlines the need for a commonly accepted definition of loss aversion.
564 citations
01 Oct 2007
TL;DR: In this paper, a parameter-free elicitation of prospect theory's utility function on the whole domain is proposed to measure loss aversion in an experimental study without making any parametric assumptions.
Abstract: textA growing body of qualitative evidence shows that loss aversion, a phenomenon formalized in prospect theory, can explain a variety of field and experimental data. Quantifications of loss aversion are, however, hindered by the absence of a general preference-based method to elicit the utility for gains and losses simultaneously. This paper proposes such a method and uses it to measure loss aversion in an experimental study without making any parametric assumptions. Thus, it is the first to obtain a parameter-free elicitation of prospect theory's utility function on the whole domain. Our method also provides an efficient way to elicit utility midpoints, which are important in axiomatizations of utility. Several definitions of loss aversion have been put forward in the literature. According to most definitions we find strong evidence of loss aversion, at both the aggregate and the individual level. The degree of loss aversion varies with the definition used, which underlines the need for a commonly accepted definition of loss aversion.
559 citations
TL;DR: In this article, the authors conducted a randomized field experiment in a setting in which workers were free to choose their working times and their efforts during working time and found that only loss averse individuals exhibit a significantly negativeneffort response to the wage increase and that the degree of loss aversion predicts the size of the negative effort response.
Abstract: Most previous studies on intertemporal labor supply found very small or insignificantnsubstitution effects. It is not clear, however, whether these results are due to institutionalnconstraints on workers’ labor supply choices or whether the behavioral assumptions of thenstandard life cycle model with time separable preferences are empirically invalid. We conducted a randomized field experiment in a setting in which workers were free to choose their working times and their efforts during working time. We document a large positive wage elasticity of overall labor supply and an even larger wage elasticity of labor hours, which implies that the wage elasticity of effort per hour is negative.nWhile the standard life cycle model cannot explain the negative effort elasticity, we show that a modified neoclassical model with preference spillovers across periods and a model withnreference dependent, loss averse preferences are consistent with the evidence. With the help of anfurther experiment we can show that only loss averse individuals exhibit a significantly negativeneffort response to the wage increase and that the degree of loss aversion predicts the size of the negative effort response.
427 citations
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TL;DR: The authors provide a memory-based account of endowment, suggesting that people construct values by posing a series of queries whose order differs for sellers and choosers, and that these aspects predict valuations.
Abstract: How do people judge the monetary value of objects? One clue is provided by the typical endowment study (D. Kahneman, J. L. Knetsch, & R. H. Thaler, 1991), in which participants are randomly given either a good, such as a coffee mug, that they may later sell ("sellers") or a choice between the good and amounts of cash ("choosers"). Sellers typically demand at least twice as much as choosers, inconsistent with economic theory. This result is usually explained by an increased weighting of losses, or loss aversion. The authors provide a memory-based account of endowment, suggesting that people construct values by posing a series of queries whose order differs for sellers and choosers. Because of output interference, these queries retrieve different aspects of the object and the medium of exchange, producing different valuations. The authors show that the content and structure of the recalled aspects differ for selling and choosing and that these aspects predict valuations. Merely altering the order in which queries are posed can eliminate the endowment effect, and changing the order of queries can produce endowment-like effects without ownership.
371 citations
TL;DR: Kahneman et al. as mentioned in this paper provided a memory-based account of endowment, suggesting that people construct values by posing a series of queries whose order differs for sellers and choosers.
Abstract: How do people judge the monetary value of objects? One clue is provided by the typical endowment study (D. Kahneman, J. L. Knetsch, & R. H. Thaler, 1991), in which participants are randomly given either a good, such as a coffee mug, that they may later sell ("sellers") or a choice between the good and amounts of cash ("choosers"). Sellers typically demand at least twice as much as choosers, inconsistent with economic theory. This result is usually explained by an increased weighting of losses, or loss aversion. The authors provide a memory-based account of endowment, suggesting that people construct values by posing a series of queries whose order differs for sellers and choosers. Because of output interference, these queries retrieve different aspects of the object and the medium of exchange, producing different valuations. The authors show that the content and structure of the recalled aspects differ for selling and choosing and that these aspects predict valuations. Merely altering the order in which queries are posed can eliminate the endowment effect, and changing the order of queries can produce endowment-like effects without ownership.
333 citations
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TL;DR: In this article, the authors measured individual-level loss aversion in riskless choices in an endowment effect experiment by eliciting both WTA and WTP from each of their 360 subjects (randomly selected customers of a car manufacturer).
Abstract: Loss aversion can occur in riskless and risky choices. Yet, there is no evidence whether people who are loss averse in riskless choices are also loss averse in risky choices. We measure individual-level loss aversion in riskless choices in an endowment effect experiment by eliciting both WTA and WTP from each of our 360 subjects (randomly selected customers of a car manufacturer). All subjects also participate in a simple lottery choice task which arguably measures loss aversion in risky choices. We find substantial heterogeneity in both measures of loss aversion. Loss aversion in the riskless choice task and loss aversion in the risky choice task are highly significantly and strongly positively correlated. We find that in both choice tasks loss aversion increases in age, income, and wealth, and decreases in education.
329 citations
TL;DR: In this paper, the authors experimentally test an alternative explanation, namely, that asymmetries are explained by classical preference theories finding influence through the experimental procedures typically used, and the results support explanations based in classical preference theory and reject endowment effect theory.
Abstract: Systematic asymmetries in exchange behavior have been widely interpreted as support for "endowment effect theory," an application of prospect theory positing that loss aversion and utility function kinks set by entitlements explain observed asymmetries. We experimentally test an alternative explanation, namely, that asymmetries are explained by classical preference theories finding influence through the experimental procedures typically used. Contrary to the predictions of endowment effect theory, we observe no asymmetries when we modify procedures to remove the influence of classical preference theories. When we return to traditional-type procedures, however, the asymmetries reappear. The results support explanations based in classical preference theories and reject endowment effect theory.
194 citations
TL;DR: In this article, the authors apply Tversky and Kahneman's [Tversky, A., Kahneman, D., 1992] cumulative prospect theory to tax evasion and show that prospect theory provides a much more satisfactory account of tax evasion including an explanation of the Yitzhaki puzzle.
Abstract: Using actual probabilities of audit and penalty rates, the return on evasion is 91–98%. So why do not most of us evade? Existing analysis, based on expected utility theory (EUT) is unable to explain this. Furthermore, and contrary to intuition and the bulk of evidence, EUT predicts that evasion should be decreasing in the tax rate (Yitzhaki puzzle). We apply Tversky and Kahneman’s [Tversky, A., Kahneman, D., 1992. Advances in prospect theory: cumulative representation of uncertainty. Journal of Risk and Uncertainty 5, 297–323] cumulative prospect theory to tax evasion. We show that prospect theory provides a much more satisfactory account of tax evasion including an explanation of the Yitzhaki puzzle. This also provides independent confirmation of prospect theory.
191 citations
TL;DR: This work has found that for small outcomes, this pattern is reversed, and gains loom larger than losses, and the hedonic principle is explained on the basis of this reversal.
Abstract: Previous research has generally shown that people are loss averse; that is, they weigh losses more heavily than gains. In a series of three experiments, we found that for small outcomes, this pattern is reversed, and gains loom larger than losses. We explain this reversal on the basis of (a) the hedonic principle, which states that individuals are motivated to maximize pleasure and to minimize pain, and (b) the assumption that small losses are more easily discounted cognitively than large losses are.
173 citations
TL;DR: In this paper, the authors investigated whether the characteristics of the value function like concavity for gains, convexity for losses, and loss aversion apply to the dependence of life satisfaction on relative income.
TL;DR: In this article, two types of loss aversion defined by two interpretations of loss, namely, valence loss aversion (VLA) and possession loss aversion, are investigated. But neither of them imply an endowment effect for attractive items, but PLA implies a reversal of the endowment effects for unattractive items.
Abstract: Loss aversion states that “losses loom larger than gains.” We consider two types of loss aversion defined by two interpretations of loss. A loss can be defined (1) in terms of valence or (2) in terms of possession. Correspondingly, valence loss aversion (VLA) entails greater sensitivity to negative (vs. positive) changes, and possession loss aversion (PLA) entails greater sensitivity to items leaving (vs. entering) one's possession. Both types of loss aversion imply an endowment effect for attractive items, but PLA implies a reversal of the endowment effect for unattractive items. Experimental results show endowment effect reversals consistent with PLA.
TL;DR: In this paper, the authors take a close look at the "behavioural finance" explanations of the equity premium puzzle, namely myopic loss aversion and disappointment aversion, and find that a highly short-sighted investment horizon is required for the historical equity premium to be explained by loss aversion, while reasonable values for disappointment aversion are found also for long investment horizons; stocks may not only lose in the short term but also disappoint in the long term.
Abstract: This paper takes a close look at the “behavioural finance” explanations of the equity premium puzzle, namely myopic loss aversion [Benartzi, S., Thaler, R.H.,1995. Myopic loss aversion and the equity premium puzzle. Quarterly Journal of Economics 110, 73–92] and disappointment aversion [Ang, A., Bekaert, G., Liu, J., 2005. Why stocks may disappoint. Journal of Financial Economics 76, 471–508]. The paper proposes a simple specification of loss and disappointment aversion and brings these theories to the data. The main conclusion is that a highly short-sighted investment horizon is required for the historical equity premium to be explained by loss aversion, while reasonable values for disappointment aversion are found also for long investment horizons; stocks may not only lose in the short term, but also disappoint in the long term.
TL;DR: In this paper, the authors explain why most retirees do not purchase longevity insurance in the form of lifetime annuities is a long-standing puzzle, and propose that mental accounting and loss aversion can explain the unpopularity of annuity by framing them as risky gambles where potential losses loom larger than potential gains.
Abstract: As Baby Boomers enter retirement, they will look to the investment industry for ways to generate income from accumulated savings. Why most retirees do not purchase longevity insurance in the form of lifetime annuities is a long-standing puzzle. Mental accounting and loss aversion can explain the unpopularity of annuities by framing them as risky gambles where potential losses loom larger than potential gains. Moreover, behavioral anomalies can explain the prevalence of “period certain” annuities, which guarantee a minimum number of payouts. Finally, investors may prefer “longevity annuities” purchased today to begin payouts in the future to immediate annuities because investors overweight the small probability of living long enough to receive large future payouts.
TL;DR: This article showed that team decision making attenuates myopic loss aversion, but that teams are also prone to MLA, and they also found that teams' MLA has a persistent influence on individual decision making under risk.
TL;DR: The authors found that stock option holders overvalue unexercisable options relative to options being offered and to normative (e.g., Black-Scholes) valuations, and that the influence of stock price volatility on holders' subjective valuations depends on stock price trend.
Abstract: Assuming a positive influence of stock price volatility on stock option value, incentive alignment proponents argue that stock option compensation encourages managerial risk seeking and, thus, aligns managers' and shareholders' risk preferences. Our findings show that stock option holders overvalue unexercisable options relative to options being offered and to normative (e.g., Black-Scholes) valuations. Further, the influence of stock price volatility on holders' subjective valuations depends on stock price trend. In sum, results suggest that during stock option valuation, managers draw on heuristics that financial options theory and models fail to capture. We discuss implications for compensation design and research.
TL;DR: In this article, the authors used an experimental approach applied to 262 households in the Ethiopian highlands with real payoffs to estimate the magnitude and nature of risk aversion of farm households in low-income developing countries.
Abstract: "Production systems in low-income developing countries are generally poorly diversified, focusing on rainfed staple crop production and raising livestock. These activities are inherently risky and investment and production decisions by farm households are therefore made within environments that are affected by risk. Because of poorly developed or absent credit and insurance markets it is difficult to pass any of these risks to a third party. As a result, it is often found that even when the expected net return is high, households are reluctant to adopt new agricultural technologies when they involve risk. Better understanding risk behavior will be essential for identifying appropriate farm-level strategies for adaptation to climate change by low-income farmers. Despite risk's potentially central role in farm investment decisions, there have been few attempts to estimate the magnitude and nature of risk aversion of farm households in low-income developing countries. To partially close this gap, this paper uses an experimental approach applied to 262 households in the Ethiopian highlands with real payoffs. By incorporating both small and large stakes and gains and losses into the experiment, we test for the presence of low stake risk aversion and loss aversion. We find that more than 50 percent of the households are severely or extremely risk averse. This contrasts with studies in Asia where most household decision-makers exhibit moderate to intermediate risk aversion. We find that households that stand to lose as well as gain something from participation in games are significantly more risk averse than households playing gains-only games. This strongly suggests that agricultural extension efforts involving losses as well as gains may face systematic resistance by farmers in low-income, high-risk environments. Promotion of technologies with downside risks – even if the upside potential is enormous – should therefore be combined with insurance or other support. We also find that even without the possibility of losses households are much more averse to risk when stakes are high. Results indicate that insurance or other support can likely be phased out. After initial successes have convinced farmers that technologies are viable, risk aversion declines. There are also significant differences in risk averting behavior between relatively poorer and wealthier farm households, which is consistent with decreasing absolute risk aversion. This suggests that as wealth is built up households are willing to take on more risk in exchange for higher returns. Both these findings suggest a strong path dependence. Efforts to develop poor rural areas through promotion of risky technologies should take this path dependence into account. Early successes are important, but households should also be allowed to build up wealth before they are challenged or tempted to take on more risky ventures. Furthermore, the finding that even without the possibility of losses households are much more risk averse when stakes are higher, suggests that agricultural extension should start modestly before asking households to take on larger gambles." from Authors' Abstract
TL;DR: The authors showed that under loss aversion, there will be intervals over which pay is insensitive to performance, with the use of carrots but not sticks is frequently optimal, especially when risk aversion is low and reference income is e ndogenous.
Abstract: Compensation schemes often reward success b ut do not penalize failure. Fixed salaries with stock options or bonuses have this feature. Yet the standard principal–agent model implies that pay is normally monotonically increasing in performance. This paper shows that, under loss aversion, there will be intervals over which pay is insensitive to performance, with the use of carrots but not sticks is frequently optimal, especially when risk aversion is low and reference income is e ndogenous. A further benefit of capping losses, for example through options, is to discourage reckless behavior by executives seeking to resurrect their fortunes. (JEL: F3, F4)
TL;DR: This study examines neurophysiological correlates to Reference-dependence of utility evaluations in real market contexts both before and after choice to contribute to the settling of an ongoing fundamental dispute in economic theory.
01 Jan 2007
TL;DR: The authors generalize and extend the second order stochastic dominance condition available for Expected Utility to Cumulative Prospect Theory and propose new definitions of preferences represented by S-shaped value and inverse S-shape probability weighting functions.
Abstract: We generalize and extend the second order stochastic dominance condition available for Expected Utility to Cumulative Prospect Theory.
The new definitions include, among others, preferences represented by S-shaped value and
inverse S-shaped probability weighting functions.
The stochastic dominance conditions supply a framework to test different features of Cumulative
Prospect Theory. In the experimental part of the working paper we offer a test of several joint
hypotheses on the value function and the probability weighting function. Assuming empirically relevant weighting functions, we can reject the inverse S-shaped value function recently advocated by Levy and Levy (2002a), in favor of
the S-shaped form. In addition, we find generally supporting evidence for loss aversion. Violations of
loss aversion can be linked to subjects using the overall probability of winning as heuristic.
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TL;DR: In this paper, a parameter-free elicitation of prospect theory's utility function on the whole domain is proposed to measure loss aversion in an experimental study without making any parametric assumptions.
Abstract: A growing body of qualitative evidence shows that loss aversion, a phenomenon formalized in prospect theory, can explain a variety of field and experimental data. Quantifications of loss aversion are, however, hindered by the absence of a general preference-based method to elicit the utility for gains and losses simultaneously. This paper proposes such a method and uses it to measure loss aversion in an experimental study without making any parametric assumptions. Thus, it is the first to obtain a parameter-free elicitation of prospect theory's utility function on the whole domain. Our method also provides an efficient way to elicit utility midpoints, which are important in axiomatizations of utility. Several definitions of loss aversion have been put forward in the literature. According to most definitions we find strong evidence of loss aversion, at both the aggregate and the individual level. The degree of loss aversion varies with the definition used, which underlines the need for a commonly accepted definition of loss aversion.
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TL;DR: Results show that, in agreement with endowment effect theory, people value information they own much more than information they do not own, and the subjective value of information can, therefore, be affected by system design.
Abstract: Subjective judgments regarding information are important for the design of information systems. This study examines the endowment effect in the context of evaluating information. Theoretically, value judgments that affect the demand for information are influenced by ownership rights, a phenomenon known as the endowment effect in trading situations. In a simple computer simulated business game, 31 participants conducted a management task in which they were provided opportunities to buy or sell information. The bidding mechanism was incentive compatible. Results show that, in agreement with endowment effect theory, people value information they own much more than information they do not own. This portends undertrading in information. Therefore, the subjective value of information should be considered in the design of systems. Our findings indicate a place for the subjective value of information on the WTA/WTP ratio continuum that emerges from pertinent literature. The ratio for information is similar to that of market goods. Participants had a strong inclination to purchase but not to sell information even though the profit data suggests that the use of information had no objective benefit. This preference is attributed to risk aversion rather than to loss aversion, which is the most widely accepted explanation of the endowment effect. The subjective value of information can, therefore, be affected by system design.
TL;DR: The authors analyzed the role of the evaluation period for disposition investors and showed that the risk premium they require is a decreasing function of the delay between two evaluations of their portfolio, which is a well-established phenomenon in the empirical and experimental financial literature.
Abstract: The disposition effect is a well-established phenomenon in the empirical and experimental financial literature. It leads to sell winners too early and to hold losers too long. In this paper, we show that the consciousness of the disposition effect by investors lead them to require a greater risk premium to invest in stocks (when compared to rational investors). We also analyze the role of the evaluation period for disposition investors. We show that the risk premium they require is a decreasing function of the delay between two evaluations of their portfolio. The influence of the evaluation period on the equity premium looks like the one induced by myopic loss aversion (Benartzi-Thaler [1995]), but the origin is different. Valuing more often a portfolio gives more occasions to sell winning stocks and then decreases the expected return. This point is analyzed by assuming that returns are driven by a Brownian motion and that investors evaluate their portfolio at regularly spaced dates.
TL;DR: In this paper, the authors studied the effect of PAYG pensions on the risk management of old-age consumption and found that for the two highest income quintiles, old age provision should heavily rely on equity investments.
TL;DR: In this article, two variants of the risk premium, the total risk premium relative to expected value and the behavioural risk premium compared to the imputed behavioural expected value, were introduced.
TL;DR: In this paper, the authors introduced the concept of loss aversion to consumer behavioral intention at the personal psychological level to develop an integrative structural equation model for analyzing traveler psychological decision making, which can be applied to analyze the effect of non-smooth response of behavioral intention to service quality in a traveller psychological decision-making process model.
Abstract: This study introduces the concept of loss aversion to consumer behavioral intention at the personal psychological level to develop an integrative structural equation model for analyzing traveler psychological decision making. In this model, the relationship between behavioral intention and service quality is a non-smooth function based on the theory of loss aversion. The expectation service quality in the SERVQUAL model proposed by Parasuraman, Zeithaml, and Berry (PZB) serves as a reference point. This model can be applied to analyze the effect of non-smooth response of behavioral intention to service quality in a traveler psychological decision-making process model. Intercity travel among cities in Taiwan is used as an empirical example. Data were gathered in cities in Taiwan via a questionnaire survey, and the model was tested using path analysis performed by LISREL. The empirical result shows that all causal relationships are statistically significant. Service quality loss influences repurchase intention more than does Service quality gain. Finally, this study concludes by discussing managerial implications and suggesting directions for future research.
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TL;DR: In this article, the authors explore the factors that drive a prosecutor's prioritization of cases in the case of a criminal case and argue that these factors can influence the decision-making process of a prosecutor.
Abstract: The standard account in support of plea bargaining is that it reflects both likely trial and sentencing outcomes, but a growing literature explores the ways in which plea negotiations are influenced by factors other than the likelihood of conviction and the probable post-trial sentence. For example, structural factors such as limited pre-trial discovery, attorney self-interest and incompetence, pretrial detention, and determinate sentencing can affect the parties' willingness and power to negotiate. Several scholars have also observed the ways that psychological and cognitive factors, such as overconfidence, denial, information barriers, framing, anchoring, and risk aversion, can influence plea bargaining. Previous examinations of the influence of cognitive bias on plea bargaining have focused primarily on the decision making of defendants. This Article, a contribution to Marquette Law Review's symposium on plea bargaining, seeks to contribute an additional dimension to the understanding of plea bargaining dynamics by exploring influences on the decision making of prosecutors. A central tenet of plea bargaining is that prosecutors are willing to negotiate settlements to free up trial resources for other cases. Accordingly, the first step in this Article's exploration of prosecutorial decision making in plea bargaining is an examination of the factors that drive a prosecutor's prioritization of cases. Specifically, Part I argues that prosecutors prioritize cases in part by the amount of passion they feel in each case. Prosecutorial passion - how much a prosecutor "cares" about a case - is an undefined and unexplored factor in the current literature, and reflects subjective determinations beyond the strength of a case's evidence or its likely post-conviction sentence. Part II explores the ways that prosecutorial passion might affect plea bargaining. First, passion might create a conscious aversion to plea bargaining in prosecutors. Second, even when a passionate prosecutor believes she desires settlement, passion might trigger or exaggerate cognitive biases that will make settlement less likely, such as selective information processing, loss aversion, framing, overoptimism, hindsight bias, anchoring, and the sunk cost fallacy. Part III concludes with some brief thoughts regarding the implications of prosecutorial passion for plea bargaining reform.
TL;DR: In this paper, an agent-based equilibrium model with prospect theoretical features of investors is proposed to explain the price formations of financial markets, which has consistencies with, not only the equity premium puzzle and the volatility puzzle, but also great kurtosis, asymmetry of return distribution, auto-correlation of return volatility, cross correlation between return volatility and trading volume.
Abstract: An important challenge of the financial theory in recent years is to construct more sophisticated models which have consistencies with as many financial stylized facts that cannot be explained by traditional models. Recently, psychological studies on decision making under uncertainty which originate in Kahneman and Tversky's research attract a lot of interest as key factors which figure out the financial stylized facts. These psychological results have been applied to the theory of investor's decision making and financial equilibrium modeling. This paper, following these behavioral financial studies, would like to propose an agent-based equilibrium model with prospect theoretical features of investors. Our goal is to point out a possibility that loss-averse feature of investors explains vast number of financial stylized facts and plays a crucial role in price formations of financial markets. Price process which is endogenously generated through our model has consistencies with, not only the equity premium puzzle and the volatility puzzle, but great kurtosis, asymmetry of return distribution, auto-correlation of return volatility, cross-correlation between return volatility and trading volume. Moreover, by using agent-based simulations, the paper also provides a rigorous explanation from the viewpoint of a lack of market liquidity to the size effect, which means that small-sized stocks enjoy excess returns compared to large-sized stocks.
TL;DR: In this paper, psychological reasons why the enthusiasm of the general public for free international trade might be less than that of the economist are reviewed. But the reasons vary in their apparent rationality and appear to operate in concert rather than independently.
Abstract: This paper reviews psychological reasons why the enthusiasm of the general public for free international trade might be less than that of the economist. Six specific reasons are advanced: (1) lay views of utility emphasize employment over consumption; (2) status quo bias results from loss aversion; (3) people think altruistically but parochially; (4) people often consider fairness in bargaining situations; (5) people may hold inappropriate fixed pie beliefs; and (6) people may misunderstand Ricardo's principle of comparative advantage. The reasons vary in their apparent rationality and appear to operate in concert rather than independently.
TL;DR: These results challenge the common view that loss aversion engages a distinct emotion-related brain network (e.g. amygdala and insula) and uncovers a brain network whose activity increases with potential gains and decreases with potential losses.