Showing papers on "Loss aversion published in 2018"
TL;DR: A review of the evidence in support of loss aversion can be found in this article, where the upshot is that current evidence does not support that losses, on balance, tend to be any more impactful than gains.
121 citations
TL;DR: Under carbon cap-and-trade mechanism, the interaction of financial decision and operational decision in an emission-dependent supply chain consisting of one manufacturer and one capital constrained retailer who funds her business by trade credit from the manufacturer is investigated.
101 citations
TL;DR: The adaptive differential weighting of prospective gamble outcomes could partially account for the observed differences in the utility functions across the two experiments and thus provide a plausible mechanism underlying flexible risk attitudes, and support the idea that risky choices are constructed flexibly at the time of elicitation and place important constraints on neural models of economic choice.
Abstract: Monkeys and other animals appear to share with humans two risk attitudes predicted by prospect theory: an inverse-S-shaped probability-weighting (PW) function and a steeper utility curve for losses than for gains. These findings suggest that such preferences are stable traits with common neural substrates. We hypothesized instead that animals tailor their preferences to subtle changes in task contexts, making risk attitudes flexible. Previous studies used a limited number of outcomes, trial types, and contexts. To gain a broader perspective, we examined two large datasets of male macaques' risky choices: one from a task with real (juice) gains and another from a token task with gains and losses. In contrast to previous findings, monkeys were risk seeking for both gains and losses (i.e., lacked a reflection effect) and showed steeper gain than loss curves (loss seeking). Utility curves for gains were substantially different in the two tasks. Monkeys showed nearly linear PWs in one task and S-shaped ones in the other; neither task produced a consistent inverse-S-shaped curve. To account for these observations, we developed and tested various computational models of the processes involved in the construction of reward value. We found that adaptive differential weighting of prospective gamble outcomes could partially account for the observed differences in the utility functions across the two experiments and thus provide a plausible mechanism underlying flexible risk attitudes. Together, our results support the idea that risky choices are constructed flexibly at the time of elicitation and place important constraints on neural models of economic choice.SIGNIFICANCE STATEMENT We respond in reliable ways to risk, but are our risk preferences stable traits or ephemeral states? Using various computational models, we examined two large datasets of macaque risky choices in two different tasks. We observed several deviations from "classic" risk preferences seen in humans and monkeys: no reflection effect, loss seeking as opposed to loss aversion, and linear and S-shaped, as opposed to inverse-S-shaped, probability distortion. These results challenge the idea that our risk attitudes are evolved traits shared with the last common ancestor of macaques and humans, suggesting instead that behavioral flexibility is the hallmark of risky choice in primates. We show how this flexibility can emerge partly as a result of interactions between attentional and reward systems.
75 citations
TL;DR: In this article, the authors present evidence that loss aversion affects taxpayers as they file their annual tax returns, and present a framework for estimating the policy impact of this psychological phenomenon, and they estimate that taxpayers facing a payment on tax day reduce their tax liability by $34 more than taxpayers owed a refund.
Abstract: This article presents evidence that loss aversion affects taxpayers as they file their annual tax returns, and presents a framework for estimating the policy impact of this psychological phenomenon. In my theoretical framework, taxpayers manipulate the money paid to the tax authority through avoidance and evasion activities. When taxpayers face the prospect of owing the tax authority money on tax day, loss aversion generates the perception of a greater marginal utility of tax reduction and therefore motivates greater pursuit of tax reduction activities. Applying a bunching-based identification strategy to U.S. tax return data, I estimate that taxpayers facing a payment on tax day reduce their tax liability by $34 more than taxpayers owed a refund.
71 citations
TL;DR: In this paper, a large-scale study of marathon runners, the authors test whether goals act as reference points in shaping the valuation of outcomes, and they find that satisfaction as a function of relative performance exhibits loss aversion and diminishing sensitivity in both predictions of and actual experienced satisfaction.
Abstract: Theories of reference-dependent preferences, such as Prospect Theory, imply that outcomes that are just below or just above a reference point are evaluated in a qualitatively distinct fashion. In a large-scale eld study of marathon runners, we test whether goals act as reference points in shaping the valuation of outcomes. Consistent with the Prospect Theory value function, we nd that satisfaction as a function of relative performance (the dierence between a runner’s time goal and her nishing time) exhibits loss aversion and diminishing sensitivity in both predictions of and actual experienced satisfaction. However, in contrast to the standard accounts of reference dependence, we observe that loss aversion is partially driven by a discontinuity or jump at the reference point. In addition, loss aversion is moderated by goal importance, with higher goal importance producing more loss aversion. Finally, we nd that a runner’s time goal as well as their previous marathon times simultaneously impact runner satisfaction, providing support for the impact of multiple reference points on satisfaction.
70 citations
TL;DR: It is suggested that key psychological constructs in CPT, such as loss aversion and outcome and probability sensitivity, can be interpreted in terms of attention allocation, and an as-if model’s capacity to reflect characteristics of information processing is demonstrated.
Abstract: There is a disconnect in the literature between analyses of risky choice based on cumulative prospect theory (CPT) and work on predecisional information processing. One likely reason is that for expectation models (e.g., CPT), it is often assumed that people behaved only as if they conducted the computations leading to the predicted choice and that the models are thus mute regarding information processing. We suggest that key psychological constructs in CPT, such as loss aversion and outcome and probability sensitivity, can be interpreted in terms of attention allocation. In two experiments, we tested hypotheses about specific links between CPT parameters and attentional regularities. Experiment 1 used process tracing to monitor participants' predecisional attention allocation to outcome and probability information. As hypothesized, individual differences in CPT's loss-aversion, outcome-sensitivity, and probability-sensitivity parameters (estimated from participants' choices) were systematically associated with individual differences in attention allocation to outcome and probability information. For instance, loss aversion was associated with the relative attention allocated to loss and gain outcomes, and a more strongly curved weighting function was associated with less attention allocated to probabilities. Experiment 2 manipulated participants' attention to losses or gains, causing systematic differences in CPT's loss-aversion parameter. This result indicates that attention allocation can to some extent cause choice regularities that are captured by CPT. Our findings demonstrate an as-if model's capacity to reflect characteristics of information processing. We suggest that the observed CPT-attention links can be harnessed to inform the development of process models of risky choice. (PsycINFO Database Record
69 citations
TL;DR: The authors tried bridging between different behavioral economic explanations for the lack of support of the uncertainty of outcome hypothesis in spectator sports and found that fans' preferences for game uncertainty are dominated by loss aversion.
Abstract: This study tries bridging between different behavioral economic explanations for the lack of support of the uncertainty of outcome hypothesis in spectator sports We test a measure of perceived game uncertainty that is comparable to objective measures frequently tested in the literature Econometric results suggest that fans do not perceive closeness of a game differently than how economists have tended to measure it However, fans' perceptions of suspensefulness are distinct from their perceptions of game uncertainty Moreover, the finding that fans' preferences for game uncertainty are dominated by loss aversion also emerges—independently of fanship status—in our stated-preference setting (JEL L83, D12, Z2)
61 citations
TL;DR: In this paper, the authors developed a theoretical model to study the relations between risk averse consumers, retailers and producers, both in the spot and in the forward markets when consumers are able to choose between fixed tariffs and the wholesale prices.
Abstract: The benefits of smoothing demand peaks in the electricity market has been widely recognised. European countries such as Spain and some of the Scandinavian countries have recently given to the consumers the possibility to face the spot prices instead of having a fixed tariffs determined by retailers. This paper develops a theoretical model to study the relations between risk averse consumers, retailers and producers, both in the spot and in the forward markets when consumers are able to choose between fixed tariffs and the wholesale prices. The model is calibrated on a real market case - Spain - where since 2014 spot tariffs were introduced beside the flat tariffs for household consumers. Finally, simulations of agents behavior and markets performance, depending on consumers risk aversion and the number of producers, are used to analyse the implications from the model. Our results show that the quantities the retailers and the producers trade in the forward market are positively related with the loss aversion of consumers. The quantities bought by the retailers in the forward market are negatively related with the skewness of the spot prices. On the contrary, quantity sold forward by producers are positively related with the skewness of the spot prices (high probability of getting high prices increase the forward sale) and with the total market demand. In the spot market, the degree of loss aversion of consumers determine the quantity the retailers buy in the spot market but does not have a direct effect on the spot prices.
53 citations
TL;DR: The authors analyzed participants' facial expressions with facereading software before and while the market is operating and found that greater positive emotion in facial expressions before the market opens predicts higher prices and larger bubbles.
Abstract: We consider the relationship between the emotional state of traders and market prices. We create asset markets with the structure first studied by Smith, Suchanek and Williams (1988), which is known to generate price bubbles and crashes. We analyze participants' facial expressions with facereading software before and while the market is operating. We find that greater positive emotion in facial expressions before the market opens predicts higher prices and larger bubbles. Greater fear predicts lower prices and smaller bubbles. Those traders who remain the most neutral during periods of market volatility achieve the highest earnings. Loss aversion in decision making is correlated with fear, not with other emotions.
51 citations
TL;DR: This article used Dynamically Optimized Sequential Experimentation (DOSE) to estimate individual-level loss aversion in a representative sample of the US population (N = 2;000) DOSE elicitations are more accurate, more stable across time, and faster to administer than standard methods.
Abstract: We introduce DOSE - Dynamically Optimized Sequential Experimentation - and use it to estimate individual-level loss aversion in a representative sample of the US population (N = 2;000) DOSE elicitations are more accurate, more stable across time, and faster to administer than standard methods We find that around 50% of the US population is loss tolerant This is counter to earlier findings, which mostly come from lab/student samples, that a strong majority of participants are loss averse Loss attitudes are correlated with cognitive ability: loss aversion is more prevalent in people with high cognitive ability, and loss tolerance is more common in those with low cognitive ability We also use DOSE to document facts about risk and time preferences, indicating a high potential for DOSE in future research
47 citations
TL;DR: In this paper, the authors investigate how managerial incentives alter family and non-family firms' risk preferences and find that greater managerial stock ownership, which has a longer-term time horizon, results in a larger increase in risk for nonfamily firms relative to family firms.
TL;DR: The authors show that reference points increase people's sensitivity to objective changes in value, while not being consistent with loss aversion, and that anchor points other than the status quo may serve as reference points and that people may use more than one reference point simultaneously.
TL;DR: In this article, the authors introduced the conditional value-at-risk (CVaR) measure to hedge against the risks for the loss-averse newsvendor, and derived the optimal order quantities for the news-vendor to maximize the CVaR objective of utility with and without the shortage cost, respectively.
TL;DR: This paper uses a mixed integer linear programming approach to provide decision-making support that shows a supply manager the ‘elasticity of ( expected) losses versus (expected) profits’ and shows how the minimum value of the gross margin needed for the strategy’s profitability affects that strategy.
Abstract: This paper studies the problem of supplier selection and order allocation in a retail supply chain (comprising suppliers, a central purchasing unit and outlets) under disruption risk. The final demand is deterministic. Suppliers are located in different geographic areas, and supplies are subject to a positive probability of disruption. Different capacity and failure probabilities for each supplier are considered. Our analysis focuses on the insurance versus profitability trade-off faced by a supply manager who buys from suppliers for the outlets. Instead of determining optimal decisions given an objective function and the risk sensitivity of the decision-maker, we use a mixed integer linear programming approach to provide decision-making support that shows a supply manager the ‘elasticity of (expected) losses versus (expected) profits’. Under this model, and depending on the profit-and-loss targets, a supply manager of known risk sensitivity (i.e. risk aversion and loss aversion) can make better decisions...
TL;DR: Although the intertemporal allocation of incentives is nonstandard, the optimal contract is well behaved as essential features of the contract with classical preferences—no rents to the agent, conditions to achieve first-best cost and non-optimality of ex-post random contracts—still hold.
TL;DR: It is found that in a competitive environment, testosterone level increases significantly, leading to greater risk‐taking than in noncompetitive environment, and the importance of the endocrine system on financial decision‐making is underscored.
Abstract: We examine the relation between testosterone, cortisol, and financial decisions in a sample of naive investors. We find that testosterone level is positively related to excess risk-taking, whereas cortisol level is negatively related to excess risk-taking (correlation coefficient [r]: 0.75 and -0.21, respectively). Additionally, we find support for the dual-hormone hypothesis in a financial context. Specifically, the testosterone-to-cortisol ratio is significantly related to loss aversion. Individuals with a higher ratio are 3.4 times more likely to sell losing stocks (standard error [SE]: 1.63). Furthermore, we find a positive feedback loop between financial success, testosterone, and cortisol. Specifically, financial success is significantly related to higher post-trial testosterone and cortisol by a factor of 0.53 (SE: 0.14). Finally, we find that in a competitive environment, testosterone level increases significantly, leading to greater risk-taking than in noncompetitive environment. Overall, this study underscores the importance of the endocrine system on financial decision-making. The results of this study are relevant to a broad audience, including investors looking to optimize financial performance, industry human resources, market regulators, and researchers.
TL;DR: This analysis reveals a threshold policy on the firm’s ordering and pricing decisions while considering the impact of reference point effects and finds that as the level of optimism increases, the firms’ optimal ordering level decreases and optimal price increases.
TL;DR: This study shows the involvement of loss aversion in particular, and proposes that individuals high in loss aversion are discouraged from carrying out the suicide attempt because of a greater focus on the negative consequences of the decision.
Abstract: Background: Loss aversion is a central and well operationalized trait behavior that describes the tendency for humans to strongly prefer avoiding losses to making equivalent gains. Human decision-making is thus biased towards safer choices. Aim: The aim of this study was to explore the relationship between loss aversion and suicidal behavior in a large cohort of adolescents recruited in 30 schools of seven European countries for a longitudinal study (Current Controlled Trials ISRCTN65120704). We hypothesized that individuals with higher loss aversion would be less likely to attempt suicide. Methods: A mixed monetary gamble task was used to generate loss aversion scores for each participant. Logistic regression was used to estimate the cross-sectional association between loss aversion and life-time suicide attempts in the baseline sample (N = 2158; 156 attempters), and incident attempts were predicted in a four-month prospective model (N = 1763; 75 attempters). Multiple regression was used to estimate the association between loss aversion and suicidal ideation. Results: Loss aversion was a significant predictor of attempted suicide in both the cross-sectional (OR = .79; P = .005) and prospective analysis (OR = .81; P = .040), adjusting for depression, anxiety, stress, and sex. The correlation between pre and post measures of loss aversion was r = .52 (P < .001). Interestingly, although depression, anxiety and stress was associated with suicidal ideation, loss aversion was not (cross-sectional model: P = .092; Prospective model: P = .390). This suggests the concept of loss aversion may be useful in understanding the transition from suicidal thoughts to attempts. Conclusions: This and previous studies suggest that altered decision-making is involved in suicide attempts. In our study we show the involvement of loss aversion in particular, and propose that individuals high in loss aversion are discouraged from carrying out the suicide attempt because of a greater focus on the negative consequences of the decision.
TL;DR: In this article, the portfolio selection problem of a finite-lived agent who does not tolerate a decline in standard of living is studied, where the preference can be regarded as exhibiting extreme-form of habit formation and also related to loss aversion in the prospect theory.
TL;DR: A Bayesian adaptive algorithm to assess measures of impulsive and risky decision making, implemented as an experimental battery to measure temporal and probability discounting rates together with loss aversion, and tested on a healthy participant sample.
Abstract: Using simple mathematical models of choice behavior, we present a Bayesian adaptive algorithm to assess measures of impulsive and risky decision making. Practically, these measures are characterized by discounting rates and are used to classify individuals or population groups, to distinguish unhealthy behavior, and to predict developmental courses. However, a constant demand for improved tools to assess these constructs remains unanswered. The algorithm is based on trial-by-trial observations. At each step, a choice is made between immediate (certain) and delayed (risky) options. Then the current parameter estimates are updated by the likelihood of observing the choice, and the next offers are provided from the indifference point, so that they will acquire the most informative data based on the current parameter estimates. The procedure continues for a certain number of trials in order to reach a stable estimation. The algorithm is discussed in detail for the delay discounting case, and results from decision making under risk for gains, losses, and mixed prospects are also provided. Simulated experiments using prescribed parameter values were performed to justify the algorithm in terms of the reproducibility of its parameters for individual assessments, and to test the reliability of the estimation procedure in a group-level analysis. The algorithm was implemented as an experimental battery to measure temporal and probability discounting rates together with loss aversion, and was tested on a healthy participant sample.
TL;DR: It is found that concurrent glucocorticoid and noradrenergic activity prompts an alignment of reward- with loss-sensitivity, and thus diminishes loss aversion, and the results have implications for the understanding of the susceptibility to biases in decision making.
TL;DR: This article found that workers were 25 percent more likely to accept penalty contracts, with no evidence of adverse or advantageous selection, and that penalty contracts also increased performance on the job by 0.2 standard deviations.
Abstract: Empirically, labor contracts that financially penalize failure induce higher effort provision than economically identical contracts presented as paying a bonus for success, an effect attributed to loss aversion. This is puzzling, as penalties are infrequently used in practice. The most obvious explanation is selection: loss averse agents are unwilling to accept such contracts. I formalize this intuition, then run an experiment to test it. Surprisingly, I find that workers were 25 percent more likely to accept penalty contracts, with no evidence of adverse or advantageous selection. Consistent with the existing literature, penalty contracts also increased performance on the job by 0.2 standard deviations. I outline extensions to the basic theory that are consistent with the main results, but argue that more research is needed on the long-term effects of penalty contracts if we want to understand why firms seem unwilling to use them.
TL;DR: In this article, the effects of property rights and the resulting loss aversion on contest outcomes were analyzed and a loss aversion model was introduced to predict average bids in descending order in the loss, the mixed, and the gain treatment.
Abstract: We analyze the effects of property rights and the resulting loss aversion on contest outcomes. We study three situations: in ‘gain’ two players start with no prize and make sunk bids to win a prize; in ‘loss’ both the players start with prizes and whoever loses the contest loses their prize; and in ‘mixed’ only one player starts with a prize that stays with him if he wins, but is transferred to the rival otherwise. Since the differences among the treatments arise only from framing, the expected utility and the standard loss aversion models predict no difference in bids across treatments. We introduce a loss aversion model in which the property rights are made salient, and as a result the reference point varies across treatments. This model predicts average bids in descending order in the loss, the mixed, and the gain treatment; and higher bids by the player with property rights in the mixed treatment. The results from a laboratory experiment broadly support these predictions. There is no significant difference in bids in the loss (gain) treatment and bids by property rights holder (non-holder) in the mixed treatment. A model incorporating both loss aversion and social preferences explains this result.
TL;DR: It is found that an increase in the diversity of consumers' tastes reduces equilibrium profits if consumer valuation is low but has the opposite effect if consumer valuations is high, and the robustness of the findings are assessed by extending the model in different directions.
Abstract: Products such as Nike running shoes, Gillette razors, and Gatorade sports drink serve as the standard against which consumers evaluate other members of the category. Empirical evidence suggests that consumers care about not only the consumption utility derived from a product, but also the gain-loss utility in comparison to the reference product of the category. This paper examines how reference-dependent utility affects price competition in a horizontally differentiated market where consumers' tastes are diverse. When consumer valuations are low, the reference product is priced lower than a nonreference product. In contrast, when consumer valuations are high, the reference product is priced higher than a nonreference product. Moreover, loss aversion on the price dimension always intensifies competition among low-valuation goods, whereas loss aversion on the taste dimension softens competition among high-valuation goods only if consumer sensitivity to the difference in match quality is above a threshold. We also find that an increase in the diversity of consumers' tastes reduces equilibrium profits if consumer valuation is low but has the opposite effect if consumer valuation is high. We further explore how an increase in the popularity of the reference product affects price competition. Finally, we assess the robustness of the findings by extending the model in different directions.
The online appendix is available at https://doi.org/10.1287/mnsc.2017.2834 .
This paper was accepted by Juanjuan Zhang, marketing.
TL;DR: In this article, the authors used the die-paradigm to study gender differences in cheating behavior and found that both males and females do not cheat in the absence of financial incentives.
TL;DR: In this paper, the spatial dependence in house prices is more pronounced in a rising housing market than in a falling market and can be associated with behavioural biases such as sellers' loss aversion tendency or herding of buyers.
TL;DR: Wang et al. as discussed by the authors developed a newsvendor model which captures important features of remanufacturing system including demand uncertainty, consumer loss aversion, and consumer choice between new and remanufactured products.
TL;DR: In this paper, the authors considered the loss aversion behavior of the private firm and showed that the optimal initial contract is renegotiation-proof in one demand state while inducing renegotiation in other demand states.
Abstract: In BOT road project, the government offers a firm an ex ante contract, which specifies toll price and concession period based on the forecasted demand. When the demand states are observed in the operation period, the government may request renegotiation to adapt the initial contract to the realized demand state. By considering the loss aversion behavior of the private firm, this paper shows that renegotiation takes place only if the private firm’s extent of loss aversion is sufficiently small. However, in what direction the government adjusts toll price and concession period depends on the combined effects of initial price, demand level, and demand uncertainty in each demand state. This paper has further investigated the optimal initial contract. We find that if one demand state realizes with a sufficiently large probability, then the optimal initial contract is renegotiation-proof in this demand state while inducing renegotiation in other demand states; if all demand states realize with almost equal probabilities, whether the optimal initial contract prevents or induces renegotiations in all demand states depends on the private firm’s extent of loss aversion. This paper makes two major contributions to the literature. First, we apply loss aversion to the context of renegotiation in BOT road projects and show that renegotiation is costly. Second, we consider the optimal initial contract in anticipation of ex post renegotiation and show that the government should trade off between ex ante social welfare and ex post psychological loss. To obtain more insights and to strengthen our model results, we have reexamined the optimal renegotiation and initial contracts under some relaxed assumptions.
TL;DR: It is found that the loss-averse retailer’s optimal order quantity may increase in wholesale price and decrease in retail price which is differ from the risk-neutral case where the optimalOrder quantity is always decreasing in wholesale Price and increasing in retail Price.
Abstract: We consider a one-period two-echelon supply chain composed of a loss-averse supplier with yield randomness and a loss-averse retailer with demand uncertainty. At the beginning of the selling season, the retailer orders from the supplier via the wholesale price contract, and then the supplier makes his production decision. We derive the loss-averse retailer’s optimal ordering policy and the loss-averse supplier’s optimal production policy under these conditions. In addition, we discuss the effect of loss aversion on both parties’ decision making and show how loss aversion contributes to decision bias. Furthermore, we find that the loss-averse retailer’s optimal order quantity may increase in wholesale price and decrease in retail price which is differ from the risk-neutral case where the optimal order quantity is always decreasing in wholesale price and increasing in retail price. Finally, numerical examples are presented to illustrate how loss aversion and yield variance contribute to the supply chain performance.
TL;DR: The authors conducted a meta-analysis of studies in which λ parameter of the cumulative prospect theory parameter was estimated from individual choices between risky prospects, and found a small λ of 1.31, 95% CI [1.10, 1.53].
Abstract: Loss aversion is widely regarded as the most robust and ubiquitous finding in behavioural economics. According to the loss aversion hypothesis, the subjective value of losses exceeds the subjective value of equivalent gains. One common assumption in the literature is that this asymmetry represents a fundamental and stable feature of people’s preferences. In cumulative prospect theory, loss aversion is captured by the lambda (λ) parameter, which controls the steepness of the value function for losses. Estimates of λ by Tversky and Kahneman (1992) found evidence for considerable overweighting of losses in risky choice (λ = 2.25). But others find very different levels of loss aversion, with some reporting weak loss aversion or even loss neutrality. In order to assess what is the average level of λ reported in the literature, we set out to conduct a meta-analysis of studies in which λ parameter of the cumulative prospect theory parameter was estimated from individual choices between risky prospects. We draw three conclusions. First, surprisingly few studies have estimated λ using risky choices, and there are only a few datasets suitable to perform model fitting. Second, much of the data are of poor quality, making it impossible to obtain precise estimates of the prospect theory’s parameters. Third, using a random-effect meta-analysis upon the available data, we found a small λ of 1.31, 95% CI [1.10, 1.53].