Showing papers on "Loss aversion published in 2022"

Primate anterior insular cortex represents economic decision variables proposed by prospect theory

Abstract: In humans, risk attitude is highly context-dependent, varying with wealth levels or for different potential outcomes, such as gains or losses. These behavioral effects have been modelled using prospect theory, with the key assumption that humans represent the value of each available option asymmetrically as a gain or loss relative to a reference point. It remains unknown how these computations are implemented at the neuronal level. Here we show that macaques, like humans, change their risk attitude across wealth levels and gain/loss contexts using a token gambling task. Neurons in the anterior insular cortex (AIC) encode the 'reference point' (i.e., the current wealth level of the monkey) and reflect 'loss aversion' (i.e., option value signals are more sensitive to change in the loss than in the gain context) as postulated by prospect theory. In addition, changes in the activity of a subgroup of AIC neurons correlate with the inter-trial fluctuations in choice and risk attitude. Taken together, we show that the primate AIC in risky decision-making may be involved in monitoring contextual information used to guide the animal's willingness to accept risk.

Reference Dependence in the Housing Market

Abstract: We quantify reference dependence and loss aversion in the housing market using rich Danish administrative data. Our structural model includes loss aversion, reference dependence, financial constraints, and a sale decision, and matches key nonparametric moments, including a “hockey stick” in listing prices with nominal gains, and bunching at zero realized nominal gains. Households derive substantial utility from gains over the original house purchase price; losses affect households roughly 2.5 times more than gains. The model helps explain the positive correlation between aggregate house prices and turnover, but cannot explain visible attenuation in reference dependence when households are more financially constrained. (JEL D12, D91, G51, R21, R31)

Mind the framing when studying social preferences in the domain of losses

Abstract: There has been an increasing interest in altruistic behaviour in the domain of losses recently. Nevertheless, there is no consensus in whether the monetary losses make individuals more generous or more selfish. Although almost all relevant studies rely on a dictator game to study altruistic behaviour, the experimental designs of these studies differ in how the losses are framed, which may explain the diverging findings. Utilizing a dictator game, this paper studies the impact of loss framing on altruism. The main methodological result is that the dictators’ prosocial behaviour is sensitive to the loss frame they are embedded in. More specifically, in a dictator game in which the dictators have to share a loss between themselves and a recipient, the monetary allocations of the dictators are more benevolent than in a standard setting without a loss and in a dictator game in which the dictators have to share what remains of their endowments after a loss. These differences are explained by the different social norms that the respective loss frames invoke.

Primate anterior insular cortex represents economic decision variables proposed by prospect theory

Abstract: In humans, risk attitude is highly context-dependent, varying with wealth levels or for different potential outcomes, such as gains or losses. These behavioral effects have been modelled using prospect theory, with the key assumption that humans represent the value of each available option asymmetrically as a gain or loss relative to a reference point. It remains unknown how these computations are implemented at the neuronal level. Here we show that macaques, like humans, change their risk attitude across wealth levels and gain/loss contexts using a token gambling task. Neurons in the anterior insular cortex (AIC) encode the 'reference point' (i.e., the current wealth level of the monkey) and reflect 'loss aversion' (i.e., option value signals are more sensitive to change in the loss than in the gain context) as postulated by prospect theory. In addition, changes in the activity of a subgroup of AIC neurons correlate with the inter-trial fluctuations in choice and risk attitude. Taken together, we show that the primate AIC in risky decision-making may be involved in monitoring contextual information used to guide the animal's willingness to accept risk.

Correcting for discounting and loss aversion in composite time trade‐off

Abstract: Abstract Time trade‐off utilities have been suggested to be biased upwards. This bias is a result of the method being applied assuming linear utility of life duration, which is violated when individuals discount future life years or are loss averse for health. Applying a “corrective approach”, that is, measuring individuals' discount function and loss aversion and correcting time trade‐off utilities for these individual characteristics, may reduce this bias in utilities. Earlier work has developed this approach for time trade‐off in a student sample. In this study, the corrective approach was extended to composite time trade‐off (cTTO) methodology, which enabled correcting utilities for health states worse than dead. In digital interviews a sample of 150 members of the general public completed cTTO tasks for six health states, and afterward they completed measurements of loss aversion and discounting. cTTO utilities were corrected using these measurements under multiple specifications. Respondents were also asked to reflect on and adjust their cTTO utilities directly. Our results show considerable loss aversion and both positive and negative discounting were prevalent. As predicted, correction generally resulted in lower utilities. This was in accordance with the direction of adjustments made by respondents themselves.

An empirical assessment of financial literacy and behavioral biases on investment decision: Fresh evidence from small investor perception

Abstract: To have enough financial literacy, an investor must be able to make intelligent investment choices, and on the other hand, the heuristic bias, the framing effect, cognitive illusions, and herd mentality are all variables that contribute to the formation of behavioral biases, also known as illogical conduct, in the decision-making process. The current research looks specifically at behavioral biases and financial literacy influence investment choices, particularly on stock market investment. For the research, a representative sample of 450 individual investors was evaluated. A structured questionnaire was designed using the Likert’s scale method to elicit the research variables, and the data acquired were analyzed using the SEM method. According to the findings, there was a statistically significant link between heuristic bias and the development of behavioral bias in decision-making. Nevertheless, cognitive illusions, the herd mentality, and the framing effect all have a deleterious impact on behavioral biases. In addition, investors often adhere to heuristic biases rather than other irrational strategies when making investment judgments. Therefore, individual investors’ financial literacy level greatly influences the choices made about investments in the stock market.

Effect of uncertainty visualizations on myopic loss aversion and the equity premium puzzle in retirement investment decisions

Abstract: For many households, investing for retirement is one of the most significant decisions and is fraught with uncertainty. In a classic study in behavioral economics, Benartzi and Thaler (1999) found evidence using bar charts that investors exhibit myopic loss aversion in retirement decisions: Investors overly focus on the potential for short-term losses, leading them to invest less in riskier assets and miss out on higher long-term returns. Recently, advances in uncertainty visualizations have shown improvements in decision-making under uncertainty in a variety of tasks. In this paper, we conduct a controlled and incentivized crowdsourced experiment replicating Benartzi and Thaler (1999) and extending it to measure the effect of different uncertainty representations on myopic loss aversion. Consistent with the original study, we find evidence of myopic loss aversion with bar charts and find that participants make better investment decisions with longer evaluation periods. We also find that common uncertainty representations such as interval plots and bar charts achieve the highest mean expected returns while other uncertainty visualizations lead to poorer long-term performance and strong effects on the equity premium. Qualitative feedback further suggests that different uncertainty representations lead to visual reasoning heuristics that can either mitigate or encourage a focus on potential short-term losses. We discuss implications of our results on using uncertainty visualizations for retirement decisions in practice and possible extensions for future work.

Loss aversion in hotel choice: Psychophysiological evidence:

Abstract: The authors investigate the psychophysiological correlates of loss aversion in hotel choice. Consumers are frequently found reluctant to shift their choice to a subsequent option from their first e...

Debiasing through experience sampling: The case of myopic loss aversion

Abstract: We introduce a training intervention based on a novel tool to mitigate behavior consistent with myopic loss aversion (MLA). We present the results of a large-scale online experiment with 894 student participants. The study featured a two-step debiasing training intervention based on experience sampling and a subsequent elicitation of MLA. We found that participants in the baseline treatment exhibit behavior consistent with MLA, which was not the case for decision makers who underwent the debiasing training intervention. Nonetheless, we found no statistically significant difference-in-difference effect of the training intervention on the magnitude of MLA. However, when we focused on the more attentive participants, the magnitude of the difference-in-difference effect of the training intervention increased strongly and became statistically significant when controlling for age, gender, education, field of study, investment experience, and risk preferences.

Expectations-Based Loss Aversion May Help Explain Seemingly Dominated Choices in Strategy-Proof Mechanisms

Abstract: Deferred acceptance (DA), a widely implemented algorithm, is meant to improve allocations: under classical preferences, it induces preference-concordant rankings. However, recent evidence shows that—in both real, large-stakes applications and experiments—participants frequently play seemingly dominated, significantly costly strategies that avoid small chances of good outcomes. We show theoretically why, with expectations-based loss aversion, this behavior may be partly intentional. Reanalyzing existing experimental data on random serial dictatorship (a restriction of DA), we show that such reference-dependent preferences, with a degree and distribution of loss aversion that explain common levels of risk aversion elsewhere, fit the data better than no-loss-aversion preferences. (JEL D11, D82, D91)

The P‐Word : Power aversion and responsibility aversion as explanations for the avoidance of power

Abstract: Though we typically think that power is desirable, individuals will sometimes avoid power. One explanation for this behavior is some individuals are averse to the responsibility associated with power and will therefore avoid positions of power. However, people may also avoid power because they perceive it as being inherently negative. This is supported by research on lay theories of power, which suggests that those who endorse the coercive lay theory perceive powerful people as manipulative and deceitful. In this paper, we propose a new theory of power aversion that expands upon the coercive lay theory to more thoroughly explain how negative perceptions of power cause some individuals to avoid it. We draw from previous research to identify specific negative traits associated with power. Based on this, we propose that some power-averse individuals believe that possessing power will turn them into immoral, cold, selfish, and unjust people. For this reason, they avoid power. We also consider the relationship between power aversion and responsibility aversion and suggest a convergence between research on responsibility aversion and lay theories of power.

Evolutionary Game Analysis of Green Technology Innovation Behaviour for Enterprises from the Perspective of Prospect Theory

Abstract: Boosting green technology innovation of enterprise is the key to achieving a win-win situation for both environmental performance and economic performance. However, some Chinese enterprises still have hesitations and misgivings as to whether they should adopt green technology. Considering the uncertainty of the innovation and the irrational psychological factors of decision makers, the purpose of this paper is to analyse the driving mechanisms and the long-term behaviour of enterprises green technology innovation, as well as to explore what preconditions are required for enterprises to adopt green technology innovation. The methods are prospect theory and evolutionary games. This paper first calculates the equilibrium stability and evolutionary stability strategies of the enterprise green technology innovation system and then simulates the effect of subjective gains and losses values and other psychological parameters in the prospect editing and evaluation stage. Results show that increase in subjective gain and decrease in reference points and subjective spill benefit will motivate enterprises to adopt green technology innovation in the prospect editing stage; higher risk preference and lower loss aversion will increase enterprises’ motivation for green technology innovation in the prospect evaluation stage. Besides, we find that enterprise decisions are influenced by risk perception and loss aversion rather than just the magnitude of the benefits and cost. Small- and medium-sized enterprises are more likely to turn to green technology innovation than large enterprises under the same level of risk preference and loss aversion. Finally, some suggestions are put forward for the government to encourage enterprises to adopt green technology innovation. This paper can provide a reference for theoretical and practical research on evolutionary game and prospect theory on green technology innovation of enterprises.

The Effect Between Behavioral Biases and Investment Decisions Moderated by Financial Literacy on the Millennial Generation in Jakarta

Abstract: Abstract: The purpose of this research was to analyze the effect of financial literacy and behavioral bias on investment decisions in the millennial generation in DKI Jakarta. This research uses quantitative data by distributing questionnaires. The population of this research is people who live in DKI Jakarta and its surroundings. There are as many as 125 respondents in the research conducted. The data collection method used a questionnaire and for the data analysis method in this research using the SEM analysis tool. The findings of this research indicate that overconfidence bias and risk-aversion bias have a significant effect on investment decisions. Meanwhile, herding bias, disposition effect, and financial literacy have no significant effect on investment decisions

Loss aversion, the endowment effect, and gain-loss framing shape preferences for noninstrumental information

Abstract: Significance We build on Abelson and Prentice’s conjecture that beliefs are not merely valued as guides to interacting with the world, but as cherished possessions. Extending this idea to information, we show that three key phenomena which characterize the valuation of money and material goods—loss aversion, the endowment effect, and the gain-loss framing effect—also apply to noninstrumental information. We discuss, more generally, how the analogy between noninstrumental information and material goods can help make sense of the complex ways in which people deal with the huge expansion of available information in the digital age.

The Effect of Relative Income Concerns on Life Satisfaction: Relative Deprivation and Loss Aversion

Abstract: Abstract Income comparisons are important for individual well-being. We examine the shape of the relationship between relative income and life satisfaction, and test empirically if the features of the value function of prospect theory carry over to experienced utility. We draw on a unique panel dataset for a middle-income country that allows us to work with an endogenous reference income, which differs for individuals with the same observable characteristics depending on the perception error about their relative position in the distribution. We find the value function for experienced utility to be concave for both positive and, at odds with prospect theory, also negative relative income. Loss aversion holds only for incomes that are sufficiently distant from the reference income. Our heterogeneity analysis shows that the slope of the value function is contingent on people’s personality, social beliefs, and how much they care about income comparisons.

Coordination of dual-channel supply chain considering differential pricing and loss-aversion based on quality control

Abstract: This paper investigates the coordination of dual-channel supply chain under quality control with a loss-averse manufacturer and a loss-averse retailer. Facing various uncertain factors, supply chain members tend to show loss aversion, which makes their actual decision deviate from the optimal decision without considering loss aversion. Therefore, the loss aversion effect function is applied to characterize the loss aversion of members. Besides, under quality control, utility model is constructed under centralized decision and decentralized decision, and the optimal decisions are solved according to the principle of utility maximization. Further, by analyzing and comparing the optimal strategies of two typical decision structures, the wholesale price and the quality cost-sharing contract is designed to coordinate the dual-channel supply chain, and the contract is proved to be valid. Finally, the impacts of the parameters change on the optimal quality level and order price are presented through the sensitivity analysis. It is found that quality control strategy and loss aversion degree of supply chain members affect the setting of coordination contract parameters and utility of supply chain. Moreover, the coordination of dual-channel supply chain is conducive to improving the level of product quality and reducing the price difference between channels.

A new hybrid method for selecting the best project manager: TODIM-FSE and Behavioral TOPSIS

Abstract: This work aims to present the application of Multi-Criteria Decision-Making methods to the process of recruiting candidates for the position of project manager, considering aspects of the decision maker's preferences in uncertain and risk scenarios. Applied, descriptive and experimental, made up of the combined employment TODIM-FSE methods for multi-criteria classification of available candidates, and the method Behavioral TOPSIS, to choose the ideal project manager. The hybrid application of the Multi-Criteria Decision-Making methods TODIM-FSE, method based on Prospect Theory, and Behavioral TOPSIS, which considers the concept of loss aversion of Economic Behavior, is essentially innovative. When using TODIM-FSE and Behavioral TOPSIS, it was verified the explicit incorporation of the risk profile of the decision maker - aggressive, neutral, or conservative - in the context of aversion or propensity to the risks associated with the management of a project. Through the personal recruiting process from a large Brazilian organization, the possibility of adopting the hybrid model resulting from the combination of the two methods in a real situation was validated. Such validation allowed us to conclude that the candidates' classifications and choices, previously normally accepted, were at odds with the profile and risk propensity of the decision makers.

Do people care about loss probabilities?

Abstract: Abstract In a series of experiments, we provide evidence that people pay special attention to the probability of losing. We first analyze this behavior in the typically used one-shot choice tasks. We then extend our analysis to repeated decisions in choice tasks, as well as allocation and investment tasks. Additionally, we test both decision making under risk and under gradually removed uncertainty, as with decisions from experience. Our findings of explicit attention to loss probabilities contradict the predictions of normative and descriptive decision theories, such as Expected Utility Theory and (Cumulative) Prospect Theory. We suggest a value function with a jump rather than a kink at the reference point, which separates gains and losses.

Loss-Framed Incentives and Employee (Mis-)Behavior

Abstract: This paper explores how loss-framed incentives affect behavior in a multitasking environment in which participants have more than one way of recovering (expected) losses. In a real-effort laboratory experiment, we offer participants task incentives that are framed as either a reward (gain) or penalty (loss). We study their responses along three dimensions: performance in the incentivized task, theft, and voluntary provision of help. We find that framing incentives as a penalty rather than as a reward does not significantly improve task performance, but it increases theft and leads to a small and insignificant reduction in the share of participants willing to help the experimenter. Secondary analyses based on our theoretical framework help us pin down the mechanism at play and suggest that loss aversion drives participants’ response. Our findings have important implications for incentive design in practice. This paper was accepted by Axel Ockenfels, behavioral economics and decision analysis.

Stick or carrot for traffic demand management? Evidence from experimental economics

Abstract: The debate between stick (penalties) and carrot (rewards) strategies has been widely carried out in various academic realms, including transportation. This paper seeks to compare the instantaneous and longitudinal effectiveness of a traditional penalty-based congestion pricing strategy and an innovative Incentive-Based Traffic Demand Management (IBTDM) strategy using an online interactive laboratory experiment focused on departure time choice. We also investigate the social-economic phenomena of loss aversion and risk aversion. The experimental results show that penalties and rewards can both positively induce sustainable travel behavior. The stronger demand-shifting performance of the penalty-based strategy at first demonstrates that ‘loss aversion’ does exist in TDM, at least initially. However, this loss aversion weakens as the experiment continues, which verifies the myopic loss aversion theory. Moreover, risky decision-making in the gambling games proves the existence of risk seeking, which violates the ‘certainty effect’. To overcome the disadvantage of laboratory experiment that participants need to accomplish the experiment all in once for considerably long time, an agent-based model is calibrated based on real participants’ behavior to further verify the long-term effectiveness of penalties and rewards, and to verify the effectiveness of other optimized penalty/reward schemes. The simulated results based on the agent-based model indicate that the theoretical optimal penalty scheme performs better in general in congestion alleviation, while a more reasonable reward scheme that considers psychological factors can achieve the same effectiveness in terms of total system travel time reduction. The findings of this research can be used to guide the design of TDM strategies, and the behavioral data collection approach based on our laboratory experiment is portable for future studies.

Bid outcome processing in Vickrey auctions: An ERP study

Abstract: Abstract Online retailers often sell products using a socially competitive second‐price sealed‐bid auction known as a Vickrey auction (VA), an incentivized demand‐revealing mechanism used to elicit players' subjective values. The VA presents a situation of risky decision‐making, which typically implements value processing and a loss aversion mechanism. Neural outcome processing of VA bids are not known; this study explores this for the first time using EEG. Twenty‐eight healthy participants bid on household items against an anonymous, computerized opponent. Bid outcome event‐related potentials were predicted to differentiate between three conditions: outbid (no‐win), large margin win (bargain), and small margin win (snatch). Individual loss aversion values were evaluated in a separate behavioral experiment offering gains or losses of variable amounts but equal chances against an assured gain. Processing outcomes of VA bids were associated with a feedback‐related negativity (FRN) potential with a spatial maximum at the vertex (251–271 ms), where bargain win trials resulted in greater FRN amplitudes than snatch win trials. Additionally, a P300 potential was sensitive to win versus no‐win outcomes and to retail price. Individual loss aversion level did not correlate with the strength of FRN or P300. Results show that outcome processing in a VA is associated with FRN that differentiates between relatively advantageous and less advantageous gains, and a P300 that distinguishes between the more and less expensive auction items. Our findings pave the way to an objective exploration of economic decision‐making and purchasing behavior involving a widely popular auction.