Showing papers on "Loss aversion published in 2020"

Expectations, reference points, and compliance with COVID-19 social distancing measures

Abstract: We surveyed representative samples of Italian residents at three critical points in the COVID-19 pandemic, to test whether and how intentions to comply with social-isolation restrictions respond to the duration of their possible extension. Individuals reported being more likely to reduce, and less likely to increase, their self-isolation effort if negatively surprised by a given hypothetical extension (i.e., if the extension is longer than what they expected), whereas positive surprises had no impact. These results are consistent with reference-dependent preferences, with individual expectations serving as a reference point, and loss aversion. Our findings indicate that public authorities should carefully manage expectations about policy measures and account for behavioral reactions to deviations from previous announcements.

Lottery-Related Anomalies: The Role of Reference-Dependent Preferences

Abstract: Previous empirical studies find that lottery-like stocks significantly underperform their non-lottery-like counterparts. Using five different measures of the lottery features in the literature, we ...

Toward a theory of affordable loss

Abstract: Although dozens of empirical studies have been published on effectuation as a whole, much work remains to be done on elaborating each principle in more depth. Based on an exploratory study of seven ventures from the Caribbean island of Curacao, this paper develops an elaborated process model of the affordable loss heuristic in effectuation. The model breaks affordable loss into two components—ability and willingness, and connects these to the concept of loss aversion from prospect theory. Furthermore, these components are encapsulated in a process involving identity, affect, and resourcefulness leading to the entry-stage entrepreneurial investment decision.

Age differences in risk attitude are shaped by option complexity.

Abstract: The canonical conclusion from research on age differences in risky choice is that older adults are more risk averse than younger adults, at least in choices involving gains. Most of the evidence for this conclusion derives from studies that used a specific type of choice problem: choices between a safe and a risky option. However, safe and risky options differ not only in the degree of risk but also in the amount of information to be processed-that is, in their complexity. In both an online and a lab experiment, we demonstrate that differences in option complexity can be a key driver of age differences in risk attitude. When the complexity of the safe option is increased, older adults no longer seem more risk averse than younger adults (in gains). Using computational modeling, we test mechanisms that potentially underlie the effect of option complexity. The results show that participants are not simply averse to complexity, and that increasing the complexity of safe options does more than simply make responses more noisy. Rather, differences in option complexity affect the processing of attribute information: whereas the availability of a simple safe option is associated with the distortion of probability weighting and lower outcome sensitivity, these effects are attenuated when both options are more similar in complexity. We also dissociate these effects of option complexity from an effect of certainty. Our findings may also have implications for age differences in other decision phenomena (e.g., framing effect, loss aversion, immediacy effect). (PsycInfo Database Record (c) 2020 APA, all rights reserved).

Auctions with Loss Averse Bidders

Abstract: We theoretically and experimentally study independent private value auctions in the presence of bidders who are loss averse in the sense of Koszegi and Rabin (2007). In one specification, we consider gains and losses in two dimensions separately, about whether they receive the object or not, and how much they pay (narrow bracketing of gains and losses); in the other specification, we consider gains and losses over the entire risk neutral pay off, i.e. the valuation less the bid (wide bracketing of gains and losses). With wide bracketing, we show that the expected revenue for the auctioneer is higher in the first price auction than in the all pay auction, and with narrow bracketing, we show that the opposite is true for the revenue ranking between the first price auction and the all pay auction. In order to test the theoretical predictions, we conduct laboratory experiments, in which money and a real object is auctioned in both a first price auction and an all pay auction. In both settings, the average revenue is significantly higher in the first price auction, suggesting that bidders may behave according to the one dimensional model, although a real object is auctioned. Whereas our findings are inconsistent with narrow bracketing of gains and losses, they are consistent with wide bracketing of gains and losses.

Consumption and Portfolio Choice Under Loss Aversion and Endogenous Updating of the Reference Level

Abstract: We explicitly derive and explore the optimal consumption and portfolio policies of a loss-averse individual who endogenously updates his or her reference level over time. We find that the individual protects current consumption by delaying painful reductions in consumption after a drop in wealth, and increasingly so with higher degrees of endogeneity. The incentive to protect current consumption is stronger with a medium wealth level than with a high or low wealth level. Furthermore, this individual adopts a conservative investment strategy in normal states and typically a more aggressive strategy in good and bad states. Endogeneity of the reference level increases overall risk-taking and generates an incentive to reduce risk exposure with age even without human capital. The welfare loss that this individual would suffer under the conventional constant relative risk aversion (CRRA) consumption and portfolio policies easily exceeds 10%.

Dopamine-Dependent Loss Aversion during Effort-Based Decision-Making.

Abstract: From psychology to economics there has been substantial interest in how costs (e.g., delay, risk) are represented asymmetrically during decision-making when attempting to gain reward or to avoid punishment. For example, in decision-making under risk, individuals show a tendency to prefer to avoid punishment than to acquire the equivalent reward (loss aversion). Although the cost of physical effort has recently received significant attention, it remains unclear whether loss aversion exists during effort-based decision-making. On the one hand, loss aversion may be hardwired due to asymmetric evolutionary pressure on losses and gains and therefore exists across decision-making contexts. On the other hand, distinct brain regions are involved with different decision costs, making it questionable whether similar asymmetries exist. Here, we demonstrate that young healthy human participants (Females:Males=16:6) exhibit loss aversion during effort-based decision-making by exerting more physical effort in order to avoid punishment than to gain a same-size reward. Next, we show that medicated Parkinson9s disease (PD) patients (Females:Males=9:9) show a reduction in loss aversion compared to age-matched controls (Females:Males=11:9). Behavioural and computational analysis revealed that people with PD exerted similar physical effort in return for a reward, but were less willing to produce effort in order to avoid punishment. Therefore, loss aversion is present during effort-based decision-making and can be modulated by altered dopaminergic state. This finding could have important implications for our understanding of clinical disorders that show a reduced willingness to exert effort in the pursuit of reward. SIGNIFICANCE STATEMENT Loss aversion — preferring to avoid punishment than to acquire equivalent reward — is an important concept in decision-making under risk. However, little is known about whether loss aversion also exists during decisions where the cost is physical effort. This is surprising given that motor cost shapes human behaviour, and a reduced willingness to exert effort is a characteristic of many clinical disorders. Here, we show that healthy human individuals exert more effort to minimise punishment than to maximise reward (loss aversion). We also demonstrate that medicated Parkinson9s disease patients exert similar effort to gain reward but less effort to avoid punishment when compared with healthy age-matched controls. This indicates that dopamine-dependent loss aversion is crucial for explaining effort-based decision-making.

COVID-19 and Panic Buying: An Examination of the Impact of Behavioural Biases

Abstract: COVID-19 pandemic has created havoc around the globe since it first started infecting humans in December 2019. It has not only created a significant health and economic crisis for the world but also caused unusual individual behaviours such as panic buying all around the world. At the outset, the rationality behind these abnormal behaviours is hard to explain as such behaviours are naturally irrational. Thus, this study attempted to explain individual behaviours observed in various countries through the theoretical lens of several established behavioural theories to make a recommendation for changing people’s behaviour during a future pandemic. Taking a quantitative approach with a comprehensive review of recent literature and using secondary data from online sources, the study analysed people’s behaviours in numerous countries using several behavioural theories. The study found that excessive information, sometimes rumours and misinformation, circulated through social and news media had played a significant role in the unprecedented panic buying observed around the world. As explained in behavioural theories, during a pandemic, people are compelled to make quick decisions and to take actions to subside their negative emotions, such as fear and anxiety so that they feel better and safe. In doing so, people use their heuristics or mental shortcuts which leads to panic buying behaviours. More specifically, the behaviours such as affect heuristic, availability heuristic, loss aversion, regret aversion, risk aversion, framing, hoarding, herding and bandwagon effect had primarily contributed to the panic buying occurred during the COVID-19 pandemic. Finally, based on the findings, the study made several recommendations to stakeholders so that they would be able to make people better prepared for a future pandemic.

Reduced loss aversion and inhibitory control in adolescents with internet gaming disorder.

Abstract: As adolescents are in a crucial developmental period, they are more susceptible than adults to Internet gaming disorder (IGD). The dual-system model proposed by Casey, Jones, and Hare (2008) emphasized the equal importance of reward-seeking and cognitive control systems in accounting for adolescents' risky behaviors. Considering that no study has simultaneously examined reward seeking (loss aversion, i.e., loss sensitivity relative to gain sensitivity) and cognitive control (inhibitory control) in IGD, this study aimed to investigate loss aversion and inhibitory control in the same IGD adolescent population. Forty five adolescent patients with IGD and 43 matched healthy control participants completed a mixed gambles task and a stop-signal task to measure loss aversion and inhibitory control, respectively. Two main findings were identified in this study. First, the IGD participants showed concurrent reduced loss aversion and inhibitory control, suggesting that differences in both systems serve as behavioral markers of IGD in adolescents. Second, the IGD participants were categorized into 2 distinct subtypes based on differences in loss aversion and inhibitory control, which implies specific therapies for specific subtypes of IGD adolescents. Therefore, this study extends the application of the dual-system model to explain adolescents' excessive Internet gaming behavior. (PsycInfo Database Record (c) 2020 APA, all rights reserved).

Two-sided matching and strategic selection on freight resource sharing platforms

Abstract: To resolve problems of information asymmetry and low matching efficiency in freight market, a freight resource sharing platform must provide accurate and readily acceptable vehicle-cargo matching results. We study a two-sided matching model, and analyze the impact of suppliers and demanders’ loss aversion on matching results. We find that users’ loss aversion positively influences the accuracy of vehicle-cargo matching. Next, we construct an evolutionary game model and investigate the trend of users’ strategic selection of the matching results recommended by the platform and the factors influencing their selection. Within their respective limits, the platform’s service level, the users’ initial acceptance probability and waiting cost are found to have a positive impact on the evolutionary trend of users’ acceptance of the matching results. The models are verified using numeric analyses. Several suggestions are made for improving platform matching efficiency.

Preference-based evolutionary multi-objective optimization for portfolio selection: a new credibilistic model under investor preferences

Abstract: We propose a new credibility portfolio selection model, in which a measure of loss aversion is introduced as an objective function, joint to the expected value of the returns and the below-mean absolute semi-deviation as a risk measure. The uncertainty of the future returns is directly approximated using the historical returns on the portfolios, so the uncertain return on a given portfolio is modeled as an LR-power fuzzy variable. Quantifying the uncertainty by means of a credibility distribution allows us to measure the investors’ loss aversion as the credibility of achieving a non-positive return, which is better perceived by investors than other measures of risk. Furthermore, we analyze the relationships between the three objective functions, showing that the risk measure and the loss aversion function are practically uncorrelated. Thus, the information provided by these criteria do not overlap each other. In order to generate several non-dominated portfolios taking into account the investor’s preferences and that the problem is non-linear and non-convex, we apply up to three preference-based EMO algorithms. These algorithms allow to approximate a part of the Pareto optimal front called region of interest. We analyze three investor profiles taking into account their loss-adverse attitudes: conservative, cautious and aggressive. A computational study is performed with data of the Spanish stock market, showing the important role played by the loss aversion function to generate a diversified set of non-dominated portfolios fitting the expectations of each investor.

The Impact of the Behavioral Factors on Investment Decision-Making: A Systemic Review on Financial Institutions

Abstract: The purpose of the study is to identify the effects of behavioral factors (cognitive biases) on financial decision-making. A systematic review method was implemented and selected 29 research published studies between the years 2010-2020 and were critically reviewed. The main findings of the study indicate that the most common factors appear in papers were overconfidence (18), anchoring bias (11), herding effect (10) and loss aversion (9), which has a significant impact on the financial decision making process. Moreover, almost half of the articles were survey-based (questionnaire), quantitative method and the rest of the articles were the qualitative and mixed-methods. The study concluded that the overall impact of behavioral/psychological factors highly influence on financial decision-making. However, the time and search of the key terms in the papers’ title were considered as the key limitations, which prevent in-depth investigation of the study. For future research, those most repetitive cognitive bias should be measured during COVID-19 pandemic uncertain situation.

History-Dependent Risk Preferences: Evidence from Individual Choices and Implications for the Disposition Effect

Abstract: We use trading data from a sports wagering market to estimate individual risk preferences within the prospect-theory paradigm. The experimental-like features of this market greatly facilitate the estimation of risk preferences, while our long panel enables us to study whether preferences vary across individuals and depend on earlier outcomes. Our estimates i) extend support for existing experimental findings --- mild utility curvature, moderate loss aversion, and probability overweighting of extreme outcomes --- to a real market setting that shares similarities with traditional financial markets, ii) reveal that risk attitude is widely heterogeneous and history-dependent, and iii) indicate that prospect theory can better explain the prevalence of the disposition effect than previously thought.

Using dynamic monitoring of choices to predict and understand risk preferences.

Abstract: Navigating conflict is integral to decision-making, serving a central role both in the subjective experience of choice as well as contemporary theories of how we choose. However, the lack of a sensitive, accessible, and interpretable metric of conflict has led researchers to focus on choice itself rather than how individuals arrive at that choice. Using mouse-tracking-continuously sampling computer mouse location as participants decide-we demonstrate the theoretical and practical uses of dynamic assessments of choice from decision onset through conclusion. Specifically, we use mouse tracking to index conflict, quantified by the relative directness to the chosen option, in a domain for which conflict is integral: decisions involving risk. In deciding whether to accept risk, decision makers must integrate gains, losses, status quos, and outcome probabilities, a process that inevitably involves conflict. Across three preregistered studies, we tracked participants' motor movements while they decided whether to accept or reject gambles. Our results show that 1) mouse-tracking metrics of conflict sensitively detect differences in the subjective value of risky versus certain options; 2) these metrics of conflict strongly predict participants' risk preferences (loss aversion and decreasing marginal utility), even on a single-trial level; 3) these mouse-tracking metrics outperform participants' reaction times in predicting risk preferences; and 4) manipulating risk preferences via a broad versus narrow bracketing manipulation influences conflict as indexed by mouse tracking. Together, these results highlight the importance of measuring conflict during risky choice and demonstrate the usefulness of mouse tracking as a tool to do so.

Financial Loss Aversion Illusion

Abstract: We test the proposition that investors' ability to cope with financial losses is much better than they expect. In a panel survey with real investors from a large UK bank, we ask for subjective ratings of anticipated returns and experienced returns. The time period covered by the panel (2008-2010), with frequent losses and gains in the portfolios of investors, provides the required background to analyze the involved hedonic experiences. We examine how the subjective ratings behave relative to expected portfolio returns and experienced portfolio returns. Loss aversion is strong for anticipated outcomes with investors reacting over twice as sensitive to negative expected returns as to positive expected returns. However, when evaluating experienced returns, the effect diminishes by more than half and is well below commonly found loss aversion coefficients. It seems that a large part of investors' financial loss aversion results from a projection bias.

Decomposing loss aversion from gaze allocation and pupil dilation.

Abstract: Loss-averse decisions, in which one avoids losses at the expense of gains, are highly prevalent. However, the underlying mechanisms remain controversial. The prevailing account highlights a valuation bias that overweighs losses relative to gains, but an alternative view stresses a response bias to avoid choices involving potential losses. Here we couple a computational process model with eye-tracking and pupillometry to develop a physiologically grounded framework for the decision process leading to accepting or rejecting gambles with equal odds of winning and losing money. Overall, loss-averse decisions were accompanied by preferential gaze toward losses and increased pupil dilation for accepting gambles. Using our model, we found gaze allocation selectively indexed valuation bias, and pupil dilation selectively indexed response bias. Finally, we demonstrate that our computational model and physiological biomarkers can identify distinct types of loss-averse decision makers who would otherwise be indistinguishable using conventional approaches. Our study provides an integrative framework for the cognitive processes that drive loss-averse decisions and highlights the biological heterogeneity of loss aversion across individuals.

Trade disruptions, behavioral biases, and social influences: Can luxury sporting goods supply chains be immunized?

Abstract: This paper studies a luxury sporting goods supply chain (LSGSC) experiencing trade disruption and market volatility. We propose a flexible trade credit contract with minimum order quantity (MOQ) and design a coordination mechanism between a supplier and a loss-averse wholesaler. We extend our study to a multi-tiered product setting and examine the impacts of social influences and loss aversion on SC decisions and channel coordination. Given the gloomy post-Covid-19 economic prospects in an era of reglobalization, this study urges trade associations and business leaders to immunize their SCs by considering behavioral biases and social influences and revisiting their contractual obligations.

Farmers’ risk aversion, loss aversion and climate change adaptation strategies in Wushen Banner, China

Abstract: This study examines the effects of farmers’ risk aversion and loss aversion on their climate change adaptation strategies. Farmers’ risk aversion and loss aversion were elicited using incentive-com...

Expectations, reference points, and compliance with COVID-19 social distancing measures

Abstract: We surveyed representative samples of Italian residents at three critical points in the COVID-19 pandemic, to test whether and how intentions to comply with social-isolation restrictions respond to the duration of their possible extension. Individuals reported being more likely to reduce, and less likely to increase, their self-isolation effort if negatively surprised by a given hypothetical extension (i.e., if the extension is longer than what they expected), whereas positive surprises had no impact. These results are consistent with reference-dependent preferences, with individual expectations serving as a reference point, and loss aversion. Our findings indicate that public authorities should carefully manage expectations about policy measures and account for behavioral reactions to deviations from previous announcements.