Showing papers on "Loss aversion published in 2014"
TL;DR: The absence of a foreign language effect in the cognitive reflection test suggests that foreign language leads to a reduction of heuristic biases in decision making across a range of decision making situations and provides also some evidence about the boundaries of the phenomenon.
194 citations
TL;DR: Using structural estimation, it is shown that when losses are possible, decisions on behalf of others are more risky, and this increase in risk stems from a decrease in loss aversion when others are affected by their choices.
Abstract: We study risk taking on behalf of others, both when choices involve losses and when they do not. A large-scale incentivized experiment with subjects randomly drawn from the Danish population is conducted. We find that deciding for others reduces loss aversion. When choosing between risky prospects for which losses are ruled out by design, subjects make the same choices for themselves as for others. In contrast, when losses are possible, we find that the two types of choices differ. In particular, we find that subjects who make choices for themselves take less risk than those who decide for others when losses loom. This finding is consistent with an interpretation of loss aversion as a bias in decision making driven by emotions and that these emotions are reduced when making decisions for others.
179 citations
TL;DR: In this article, a consumer choice model of live attendance at a sporting event with reference-dependent preferences was developed, based on the "uncertainty of outcome hypothesis" (UOH) as well as fans' desire to see upsets and to simply see the home team win games, depending on the importance of the referencedependent preferences and loss aversion.
Abstract: We develop a consumer choice model of live attendance at a sporting event with reference-dependent preferences. The predictions of the model motivate the "uncertainty of outcome hypothesis" (UOH) as well as fans' desire to see upsets and to simply see the home team win games, depending on the importance of the reference-dependent preferences and loss aversion. A critical review of previous empirical tests of the UOH reveals significant support for models with reference-dependent preferences, but less support for the UOH. New empirical evidence from Major League Baseball supports the loss aversion version of the model. (JEL L83, D12) I. INTRODUCTION Recent events in economic and financial markets reemphasize the importance of understanding decision making under uncertainty. Individuals make decisions that involve uncertain outcomes in a variety of settings, including decisions about the purchase and holding of risky assets like stocks and bonds (Lintner 1965), human capital investment (Kodde 1986), labor supply (Camerer et al. 1997), gambling (Sauer 1998), entertainment (Post et al. 2008), and others. In the sports economics literature, a body of research focuses on the effect of uncertainty about game outcomes on consumer demand. The decision to attend a sporting event involves uncertainty, because the consumer does not know the outcome of the game at the time the ticket is purchased. Recent research points out the importance of reference points that reflect consumer's expectations when making decisions under uncertainty (Koszegi and Rabin 2006). The idea that demand for sporting events depends on the uncertainty of game outcomes was first identified by Rottenberg (1956) in a seminal paper and has long been referred to as the "uncertainty of outcome hypothesis" (UOH). The UOH forms the basis of a large literature on competitive balance in sport (Fort and Quirk 1995). Rottenberg (1956) observed that attendance demand depends on "the dispersion of percentages of games won by the teams in the league" (p. 246) and further observed: "That is to say, the 'tighter' the competition, the larger the attendance. A pennant-winning team that wins 80 per cent of its games will attract fewer patrons than a pennant-winning team that wins 55 per cent of them" (p. 246, footnote 21). These observations form the basis of the UOH, which generated a large empirical literature. Neale (1964), in another early paper, also addressed the UOH. Neale (1964) observed that in order for fans to attend sporting events, listen to events on radio, or watch events on television, some uncertainty of outcome about the contest must exist: "Of itself there is excitement in the daily changes in the standings or the daily changes in possibilities of changes in standings. The closer the standings, and within any range of standings the more frequently the standings change, the larger will be the gate receipts" (p. 3). Interestingly, neither Rottenberg (1956) and Neale (1964), nor any subsequent researcher, developed a model of consumer behavior to motivate this observation; the UOH has been accepted as an accurate description of the outcome of consumer choices with no theoretic basis for more than 50 years. Instead, research focused on developing models of team and league behavior that generated different levels of winning percentage dispersion, which reflects outcome uncertainty, depending on market and team characteristics. In this article, we develop a consumer choice model of the decision to attend sporting events that include uncertainty and reference-dependent preferences to motivate the UOH. Our model adopts the basic framework of the model in Card and Dahl (2009), where consumers decide whether to watch a national football league (NFL) game involving their local team on television with rational anticipation that an unexpected loss may trigger family violence. We abstract from the emotional cues and triggers in Card and Dahl's (2009) model, and focus on the decision to attend a live game. …
149 citations
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TL;DR: In this paper, the authors elicit the risk preferences of a sample of French farmers in a field-experiment setting, considering both expected utility and cumulative prospect theory, and show that farmers are characterised by a concave utility function for gain outcomes implying risk aversion.
Abstract: We elicit the risk preferences of a sample of French farmers in a field-experiment setting, considering both expected utility and cumulative prospect theory. Under the EU framework, our results show that farmers are characterised by a concave utility function for gain outcomes implying risk aversion. The CPT framework confirms this result, but also suggests that farmers are twice as sensitive to losses as to gains and tend to pay undue attention to unlikely extreme outcomes. Accounting for loss aversion and probability weighting can make a difference in the design of effective and efficient policies, contracts or insurance schemes.
137 citations
TL;DR: In this paper, the authors explored the behavioral factors influencing individual investors' decisions at the Colombo Stock Exchange and examined the relations between these factors and investment performance and found that most of the variables from all factors have moderate impacts whereas anchoring variable from heuristic factor has high influence and choice of stock variable from herding factor has low influence on investment decision.
Abstract: The main objective of this study is exploring the behavioral factors influencing individual investors’ decisions at the Colombo Stock Exchange. Furthermore, the relations between these factors and investment performance are also examined. As there are limited studies about behavioral finance in Sri Lanka, this study is expected to contribute significantly to the development of this field in Sri Lanka. The study begins with the existing theories in behavioral finance, based on which, hypotheses are proposed. Then, these hypotheses are tested through the questionnaires distributed to individual investors at the Colombo Stock Exchange. The collected data are analyzed by using SPSS. The result shows that there are four behavioral factors affecting the investment decisions of individual investors at the Colombo Stock Exchange which are Herding, Heuristics, Prospect and Market. Most of the variables from all factors have moderate impacts whereas anchoring variable from heuristic factor has high influence and choice of stock variable from herding factor has low influence on investment decision. This study also tries to find out the influence of behavioral factors on investment performance. Among the behavioral factors mentioned above, only three variables are found to influence the investment performance: choice of stock has negative influence which is from herding factor. Over confidence from heuristics factor has negative influence on investment performance. Anchoring from heuristics factor has positive influence on investment performance. All other variables which are volume of stock, buying and selling and speed of herding variables of herding factor, loss aversion and regret aversion variables of prospect factor and market information and customer preference variables of market factor do not have influence on investment performance.
127 citations
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TL;DR: The endowment effect is among the best known findings in behavioral economics and has been used as evidence for theories of reference-dependent preferences and loss aversion as discussed by the authors, however, recent literature has questioned the robustness of the effect in the laboratory, as well as its relevance in the field.
Abstract: The endowment effect is among the best known findings in behavioral economics and has been used as evidence for theories of reference-dependent preferences and loss aversion. However, a recent literature has questioned the robustness of the effect in the laboratory, as well as its relevance in the field. In this review, we provide a summary of the evidence and describe recent theoretical developments that can potentially reconcile the different findings, with a focus on expectation-based reference points. We also survey recent work from psychology that provides either alternatives to or refinements of the usual loss-aversion explanation. We argue that loss aversion is still the leading paradigm for understanding the endowment effect, but given the rich psychology behind the effect, a version of the theory that encompasses multiple reference points may be required.
122 citations
TL;DR: In this paper, the authors elicit the risk preferences of a sample of French farmers in a field-experiment setting, considering both expected utility and cumulative prospect theory, and show that farmers are characterised by a concave utility function for gain outcomes implying risk aversion.
Abstract: We elicit the risk preferences of a sample of French farmers in a field-experiment setting, considering both expected utility and cumulative prospect theory. Under the EU framework, our results show that farmers are characterised by a concave utility function for gain outcomes implying risk aversion. The CPT framework confirms this result, but also suggests that farmers are twice as sensitive to losses as to gains and tend to pay undue attention to unlikely extreme outcomes. Accounting for loss aversion and probability weighting can make a difference in the design of effective and efficient policies, contracts or insurance schemes.
109 citations
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TL;DR: It is found that measures of subjective well-being are more than twice as sensitive to negative as compared to positive economic growth, providing a new perspective on the welfare cost of business cycles.
Abstract: Are individuals more sensitive to losses than gains in terms of economic growth? Using subjective well-being data, we observe an asymmetry in the way positive and negative economic growth is experienced. We find that measures of life satisfaction and affect are more than twice as sensitive to negative economic growth as compared to positive growth. We use Gallup World Poll data from over 150 countries, BRFSS data on 2.5 million US respondents, and Eurobarometer data that cover multiple business cycles over four decades. This research provides a new perspective on the welfare cost of business cycles and has implications for growth policy and our understanding of the long-run relationship between GDP and subjective well-being.
87 citations
TL;DR: The experimental results show that a pull contract achieves higher channel efficiency than that of a push contract, and the APD contract weakly Pareto dominates the push contract; retailers are better off and suppliers are no worse off under theAPD contract.
Abstract: In this paper we experimentally investigate how the allocation of inventory risk in a two-stage supply chain affects channel efficiency and profit distribution. We first evaluate two common wholesale price contracts that differ in which party incurs the risk associated with unsold inventory: a push contract in which the retailer incurs the risk and a pull contract in which the supplier incurs the risk. Our experimental results show that a pull contract achieves higher channel efficiency than that of a push contract, and that behavior systematically deviates from the standard theory in three ways: 1 stocking quantities are set too low, 2 wholesale prices are more favorable to the party stocking the inventory, and 3 some contracts are erroneously accepted or rejected. To account for these systematic regularities, we extend the existing theory and structurally estimate a number of behavioral models. The estimates suggest that a combination of loss aversion with errors organizes our data remarkably well. We apply our behavioral model to the advance purchase discount APD contract, which combines features of push and pull by allowing both parties to share the inventory risk, in a separate experiment as an out-of-sample test, and we find that it accurately predicts channel efficiency and qualitatively matches decisions. Two practical implications of our work are that 1 the push contract performs close to standard theoretical benchmarks, which implies that it is robust to behavioral biases, and 2 the APD contract weakly Pareto dominates the push contract; retailers are better off and suppliers are no worse off under the APD contract.
Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2014.1940 .
This paper was accepted by Serguei Netessine, operations management.
83 citations
TL;DR: In this article, the effect of expectation-based consumer loss aversion on firm strategy in imperfect competition was studied and it was shown that if firms have symmetric costs, a larger share of informed consumers leads to a more competitive outcome.
Abstract: We address the effect of expectation-based consumer loss aversion on firm strategy in imperfect competition. Consumers are fully informed about match value and price at the moment of purchase. However, some consumers are initially uninformed about their tastes and form a reference point consisting of an expected match value and price distribution, whereas others are perfectly informed all the time. We show that if firms have symmetric costs, a larger share of informed consumers leads to a more competitive outcome. The reverse holds if cost asymmetry in duopoly is sufficiently large.
78 citations
TL;DR: The authors examined the impact of emotions on risk and loss aversion using Prospect Theory and found that risk aversion increases with sadness while loss aversion is negatively influenced by anger, on average, anger reduces loss aversion by half.
TL;DR: In this paper, the authors present a literature review on the use of expected utility theory (EUT), prospect theory (PT) and regret theory (RT) to model travellers' behaviour.
TL;DR: In this paper, a disutility function of loss aversion is applied to approach travelers' different attitudes towards credit loss and gain, and the transaction costs of buying and selling credits are also incorporated in the function.
Abstract: Under a given tradable credit scheme, travelers’ loss aversion behavior for credit charging during the route choice process is studied. A disutility function of loss aversion is applied to approach travelers’ different attitudes towards credit loss and gain, and the transaction costs of buying and selling credits are also incorporated in the function. The user equilibrium (UE) and market equilibrium (ME) conditions considering loss aversion effects are formulated into a variational inequality (VI) problem. Analyses demonstrate that the system optimum (SO) credit scheme does not always exist. A proposition is further presented to guarantee its existence.
TL;DR: The authors analyzed gender differences in the disposition effect in an experiment based on Weber and Camerer (1998) and found that female investors realize less capital losses, have significantly higher disposition effects and are more loss averse than men.
TL;DR: The authors analyzed gender differences in the disposition effect in an experiment based on Weber and Camerer (1998) and found that female investors realize less capital losses, have significantly higher disposition effects and are more loss averse than men.
Abstract: This paper analyzes gender differences in the disposition effect in an experiment based on Weber and Camerer (1998). The results emphasize that female investors realize less capital losses, have significantly higher disposition effects and are more loss averse than men.
TL;DR: This paper conducted a meta-analysis of 33 studies (providing 109 observations) investigating loss aversion in random utility models of brand choice, and found that loss aversion is manifest in product choice, but that it exhibits substantial variation across research contexts.
TL;DR: In this article, the authors analyzed whether social comparison can explain the low take-up of disaster insurance usually reported in field studies and found that risks in the case of disasters are highly correlated between subjects whereas risks for which high insurance takeup can be observed (e.g. extended warranties or cell phone insurance) are typically idiosyncratic.
Abstract: This paper analyzes whether social comparison can explain the low take-up of disaster insurance usually reported in field studies. We argue that risks in the case of disasters are highly correlated between subjects whereas risks for which high insurance take-up can be observed (e.g. extended warranties or cell phone insurance) are typically idiosyncratic. We set up a simple model with social reference points and show that in the presence of inequality aversion social comparison makes insurance indeed less attractive if risks are correlated. In addition we conducted a simple experiment which confirms these theoretical results. The average willingness to pay for insurance is significantly higher for idiosyncratic than for correlated risks.
TL;DR: In this paper, an exogenous decrease in the probability of winning, conditional on the bid, reduces the optimal bid of a loss averse agent whose reference point is expectations based.
Abstract: We provide a novel experimental auction design, in which (i) an exogenous decrease in the probability of winning, conditional on the bid, reduces the optimal bid of a loss averse agent whose reference point is expectations based; (ii) observed bid distributions uniquely identify the participants' latent value distribution and loss-aversion parameter. Experimental evidence affirms the presence of such reference points. We show that at the estimated magnitudes of loss aversion, (a) conventional Becker, DeGroot, and Marschak (1964) experiments may lead to large biases in estimated willingness to pay (which our design can correct for); and (b) first-price auctions may fetch moderately higher revenue, compared with second-price auctions.
TL;DR: While the probability weighting was predominantly inverse S-shaped for both attributes, it was less sensitive to probabilities and more elevated for time than for money, implying more optimism for gains and more pessimism for losses.
Abstract: We elicited the prospect theory components utility, probability weighting, and loss aversion when consequences are expressed as the time dedicated to a specific task or activity. A similar elicitation was performed for monetary consequences to allow an across-attribute time/money comparison of the elicited components at the individual level. We obtained less concave utility and smaller loss aversion for time than for money. Moreover, while the probability weighting was predominantly inverse S-shaped for both attributes, it was less sensitive to probabilities and more elevated for time than for money. This finding implies more optimism for gains and more pessimism for losses.
This paper was accepted by Peter Wakker, decision analysis.
TL;DR: In this article, a model that relates dividend payout policy to behavioral issues based on the ideas of mental accounting is proposed, and a panel analysis across 29 countries and over 43,000 firm-years demonstrates that their model studying the relation between dividends and patience, loss aversion, and ambiguity aversion can be verified empirically.
Abstract: We study a model that relates dividend payout policy to behavioral issues based on the ideas of mental accounting. A panel analysis across 29 countries and over 43,000 firm-years demonstrates that our model studying the relation between dividends and patience, loss aversion, and ambiguity aversion can be verified empirically. Our paper seems to be the first that highlights empirically in a straightforward way the relevance of behavioral patterns as important determinants for corporate dividend policy, while previous empirical studies could tackle this issue only indirectly. With several robustness tests we also address potential doubts concerning the quality of our data and analyze further implications of our theory.
TL;DR: In this paper, a loss-averse investor equipped with a specific, but still quite general, utility function motivated by behavioral finance is considered and closed-form solutions for the investor's portfolio performance measure are derived under certain concrete assumptions concerning the form of this utility.
Abstract: In this paper we consider a loss-averse investor equipped with a specific, but still quite general, utility function motivated by behavioral finance. We show that, under certain concrete assumptions concerning the form of this utility, one can derive closed-form solutions for the investor's portfolio performance measure. We investigate the effects of loss aversion and demonstrate its important role in performance measurement. The framework presented in this paper also provides a sound theoretical foundation for all known performance measures based on partial moments of the distribution.
TL;DR: In this paper, a model that relates dividend payout policy to behavioral issues based on the ideas of mental accounting is proposed, and a panel analysis across 29 countries and over 43,000 firm-years demonstrates that their model studying the relation between dividends and patience, loss aversion, and ambiguity aversion can be verified empirically.
Abstract: We study a model that relates dividend payout policy to behavioral issues based on the ideas of mental accounting. A panel analysis across 29 countries and over 43,000 firm-years demonstrates that our model studying the relation between dividends and patience, loss aversion, and ambiguity aversion can be verified empirically. Our paper seems to be the first that highlights empirically in a straightforward way the relevance of behavioral patterns as important determinants for corporate dividend policy, while previous empirical studies could tackle this issue only indirectly. With several robustness tests we also address potential doubts concerning the quality of our data and analyze further implications of our theory.
TL;DR: A newsvendor who sells a perishable asset over repeated periods to consumers with a given consumption valuation for the product is studied.
Abstract: Motivated by the supermarket practice of marking down perishable products daily, we study a newsvendor who sells a perishable asset over repeated periods to consumers with a given consumption valuation for the product. The market size in each period is random, following a stationary distribution. Consumers are loss averse with stochastic reference points that represent their beliefs about possible price and product availability. Given the distribution of reference points, they choose purchase plans to maximize their expected total utility, including gain-loss utility, before visiting the store and follow the plans in the store. In anticipation of consumers' purchase plans, in each period, before demand uncertainty resolves, the firm chooses an initial order quantity. After the uncertainty resolves, the firm chooses a contingent price depending on the demand realization, with the option of clearing inventory by charging a sale price, and otherwise, posting a full price. Over repeated periods, the interaction of the firm's operational decisions about ordering and contingent pricing and the consumers' purchase actions results in a distribution of reference points, and, in equilibrium, this distribution is consistent with consumers' beliefs. We fully characterize the firm's optimal inventory and contingent pricing policies. We identify conditions under which the firm's expected price and profit can be increasing in the consumer loss aversion level. We also show that the firm can prefer demand variability over no-demand uncertainty. We obtain a set of insights into how consumers' loss aversion affects the firm's optimal operational policies that are in stark contrast to those obtained in classic newsvendor models. As examples, the optimal full price increases in the initial order quantity, and the optimal full price decreases while the optimal sales frequency increases in the procurement cost.
TL;DR: A field experiment shows consumer's willingness to pay is inconsistent with a loss aversion explanation, and if labels are used as size information, policies governing normative names could help reduce food consumption or reduce waste.
Abstract: Labels such as 'Large' or 'Super-size' are often used to describe portion sizes. How do these normative labels influence consumer choice and how much they ultimately either consume or waste? Although one might believe that firms use normative labels to impact choice behavior through loss aversion, a field experiment shows consumer's willingness to pay is inconsistent with a loss aversion explanation. Although portions were clearly visible, individuals appeared to use the labels as objective information about their size. Importantly, a second study showed these labels also led people to eat less when food was given a larger sounding name than a smaller name (double vs. regular; regular vs. half-size). If labels are used as size information, policies governing normative names could help reduce food consumption or reduce waste.
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TL;DR: The authors provided the first incentivized test of exchange asymmetries for bads (i.e., items yielding a negative utility) and found a strong endowment effect for bad goods, so that their results speak in favor of prospect theory.
Abstract: Whereas exchange asymmetries for goods are well known, we provide a first incentivized test of exchange asymmetries for bads (i.e., items yielding a negative utility). On the one hand, prospect theory predicts an endowment effect for goods and bads, on the other hand, attention-based theories such as salience theory predict an endowment effect for goods, but a reverse endowment effect (i.e., a particular high willingness to switch) for bads. Since both strands of research often make the same predictions concerning biased decision making, the investigation of exchange asymmetries for bads is a key element to distinguish between their validity. In our experiment, we find a strong endowment effect for bads, so that our results speak in favor of prospect theory.
TL;DR: The importance of the sense of responsibility embodied in the emotion of regret in modulating economic decisions for self but not for others is discussed, suggesting that self-other asymmetrical behavior is due to the extent the decision-maker is affected by the real and emotional consequences of his/her decision.
Abstract: In everyday life, people often make decisions on behalf of others. The current study investigates whether risk preferences of decision-makers differ when the reference point is no longer their own money but somebody else money. Thirty four healthy participants performed three different monetary risky choices tasks by making decisions for oneself and for another unknown person. Results showed that loss aversion bias was significantly reduced when participants were choosing on behalf of another person compared to when choosing for themselves. The influence of emotions like regret on decision-making may explain these results. We discuss the importance of the sense of responsibility embodied in the emotion of regret in modulating economic decisions for self but not for others. Moreover, our findings are consistent with the Risk-as-feelings hypothesis, suggesting that self-other asymmetrical behavior is due to the extent the decision-maker is affected by the real and emotional consequences of his/her decision.
TL;DR: In this paper, the authors investigated the relationship between intergenerational socioeconomic mobility and subjective well-being using data from the General Social Survey (GSS), and found that downward mobility with respect to all three measures has a negative effect on the self-reported level of happiness and subjective health while upward mobility is associated with positive outcomes in subjective wellbeing.
01 Jan 2014
TL;DR: In this paper, the authors survey the literature in which risk preferences are measured and manipulated in laboratory and field experiments, and present a survey of the most commonly used measurement instruments: an investment task for allocations between a safe and risky asset, a choice menu task for eliciting probability indifference points, and a pricing task that elicits certainty equivalents of a lottery.
Abstract: This chapter surveys the rapidly growing literature in which risk preferences are measured and manipulated in laboratory and field experiments. The most commonly used measurement instruments are: an investment task for allocations between a safe and risky asset, a choice menu task for eliciting probability indifference points, and a pricing task for eliciting certainty equivalents of a lottery. These methods are compared in a manner that will help the practitioner decide which one to use, and how to deal with methodological issues associated with incentives, stakes, and the structure of choice menus. Applications involve using inferred risk preferences to document demographic effects, e.g. gender, and to explain the effects of risk aversion on observed behavior in economic in settings, e.g. bargaining, auctions, and contests. Some suggestions for evaluating the separate effects of utility curvature and probability weighting are provided.
TL;DR: It is found that consumers suffer from loss aversion on both prices and seats sold: consumers incur significant utility loss when prices are above their references or when the actual seat sales are lower than their references.
Abstract: We study the prevalence of multi-attribute loss aversion and reference effects in a revenue management setting based on data of individual level purchases over a series of concert performances. The reference dependence that drives consumer choice is not only based on the price but also on observed sales (as a fraction of the seating capacity) during their past visits. We find that consumers suffer from loss aversion on both prices and seats sold: consumers incur significant utility loss when prices are above their references or when the actual seat sales are lower than their references. We suggest pricing policies that can address consumer decisions driven by such reference dependence and loss aversion.
TL;DR: In this article, the authors extend previous reference-dependence newsvendor research by incorporating both consumer trade-offs and government subsidies to evaluate the relevant influences on the optimal electric vehicle (EV) production decisions.