Showing papers on "Loss aversion published in 2023"

Social Reference Points and Risk Taking

Abstract: Social reference points have been identified to be important determinants of individuals’ welfare. We investigate the consequences of social reference points for risk taking in a laboratory experiment. In the main treatments, risk-taking subjects observe the predetermined earnings of peer subjects when making a risky choice. We exogenously manipulate peers’ earnings and find a significant treatment effect: decision makers make less risk-averse choices in the case of larger peers’ earnings. The treatment effect is consistent with an application of prospect theory to social reference points and cannot be explained by reference points based on counterfactual information, anchoring, and experimenter demand effects. In additional analyses, we show that diminishing sensitivity seems to play an important role in subjects’ risky choices. We explore also whether inequity aversion and expectations-based reference points can account for our findings and conclude that they do not provide plausible alternative explanations for them. This paper was accepted by Yan Chen, behavioral economics and decision analysis. Funding: This research was financially supported by the Bonn Graduate School of Economics and the Center for Economics and Neuroscience in Bonn. Supplemental Material: The online appendix and data are available at https://doi.org/10.1287/mnsc.2023.4698 .

Dual-Channel Pricing Decisions for Product Recycling in Green Supply Chain Operations: Considering the Impact of Consumer Loss Aversion

Abstract: With the vigorous rise of online third-party recycling platforms, dual-channel recycling has become the primary recycling mode in the reverse supply chain (RSC). However, as the main body of recycling, consumers have a significant impact on the recycling process, and their behavioral preferences are rarely considered in the pricing decision of the reverse recycling supply chain. Based on the dual-channel RSC, this paper considers the competition among channels. It introduces the loss aversion behavior preference of consumers to establish a dual-channel RSC composed of remanufacturers and online and offline recyclers. This study aims to analyze the impact of consumers’ loss aversion behavior on the recycling pricing and profit of each node in the green RSC and discuss the decision of recyclers under consumers’ loss aversion behavior. The results show that the deeper consumers’ aversion to the loss of recycling price, the lower the recycling price of dual-channel recyclers will be, which will be more conducive to the increase in the profit of online recyclers. However, the profit of remanufacturers will be reduced, and the total amount of recycling will decline. This paper considers the impact of consumer loss aversion behavior on dual-channel reverse supply chain pricing decisions based on prospect theory. It provides references for chain members to set recycling prices to increase people’s enthusiasm for recycling and the amount of recycled scrap, contributes to the cause of resource conservation and environmental protection, and improves the economic efficiency of recycling enterprises.

The extent of algorithm aversion in decision-making situations with varying gravity

Abstract: Algorithms already carry out many tasks more reliably than human experts. Nevertheless, some subjects have an aversion towards algorithms. In some decision-making situations an error can have serious consequences, in others not. In the context of a framing experiment, we examine the connection between the consequences of a decision-making situation and the frequency of algorithm aversion. This shows that the more serious the consequences of a decision are, the more frequently algorithm aversion occurs. Particularly in the case of very important decisions, algorithm aversion thus leads to a reduction of the probability of success. This can be described as the tragedy of algorithm aversion.

Loss aversion in sequential auctions

Abstract: I analyze sequential auctions with expectations‐based loss‐averse bidders who have independent private values and unit demand. Equilibrium bids are history dependent and subject to a “discouragement effect”: the higher is the winning bid in the current round, the less aggressive are the bids of the remaining bidders in the next round. Moreover, because they experience a loss in each round in which they fail to obtain an object, bidders are willing to pay a premium to win sooner rather than later. This desire to win earlier leads prices to decline in equilibrium. I also show how various disclosure policies regarding the outcome of earlier auctions affect equilibrium bids, and that sequential and simultaneous auctions are neither bidder‐payoff equivalent nor revenue equivalent.

Time Loss Aversion

Abstract: The present paper introduces “Time Loss Aversion” - people’s tendency to fear previous misallocations of time, which then motivates people to change their future behaviour. Loss aversion has previously been achieved through framing outcomes as losses. Previous research has induced loss aversion by framing monetary outcomes as losses rather than gains.. It presents a case study where time loss aversion was used to decrease people’s social media use. Social media use was framed in a manner of time spent in one week, a month or a year, rather than in terms of daily averages (the usual approach in screen time apps). This framing significantly motivated people to reduce their future social media use. Time loss aversion has implications for “time-based addictions” - addictions where the misallocation of time results in negative outcomes to people’s health, productivity and well-being. Finally, the paper discusses how time loss aversion can be implemented in the UX and UI of mobile devices and wearables to promote better outcomes for users.

Emotional Biases and Equity Investment Decision of Individual Investors

Abstract: Emotional bias is the presentation of felling of the people about acting something. It affects the human behavior which ultimately influence the decision-making behavior of the individual investors. This study focuses on examining the influence of emotional biases on equity investment decision of individual investors. This study was based on quantitative approach of research with the sample size of 385 individual investors. However, the response rate of the study was 79% while the usable response was only 68.31% of the sample. Emotional biases are measured by loss aversion bias, overconfidence bias, endowment bias, self-control bias, regret aversion bias and status quo bias. Evidence indicates that loss aversion bias, overconfidence bias, self-control bias and regret aversion bias had significant positive influence on equity investment decision. However, endowment bias and status quo bias had no significant contribution to the equity investment decision of the individual investors in Chitwan. Hence, the equity investment decision of investors in Chitwan is broadly depend upon easily and readily available information and strongly based on their own beliefs and emotions without resorting to deep research, investigation, information processing and analysis of the securities and the market with fundamental and technical analysis that leads to overtrading and overreaction to the market, holding on too losing stock enormously, holdings on to enormous risky portfolios, selling off gaining portfolio to early and finally, making investment decisions without proper analysis of the information, decisions are based on their own moods, beliefs, emotions, past experience and stock of knowledge.

Equilibrium strategies and pricing for a congested system with opaque price and loss-averse customers

Abstract: In this paper, we study a service provider with opaque price strategy who sells services to loss-averse customers in a congestion-prone facility. The opaque price strategy means that the service provider discloses a price range of services to potential customers through social media. Loss aversion aims to characterize customers' reference-dependent preferences. We analyze a queueing game model with the help of an M/M/1 queueing system and adopt the cutoff structure characterized by reservation price to represent the loss-averse customers' joining decision. Then, we derive the loss-averse customer's reservation price and queueing strategies at equilibrium. In addition, the service provider sets the price to maximize her profit. We obtain some insights into how customers' degree of loss aversion affects the service provider's optimal price. For example, customers with a higher degree of loss aversion on the waiting time and the payment would push the service provider to decrease the optimal price. Customers with a higher degree of loss aversion about the service reward would urge the service provider to increase the optimal price. Furthermore, considering the attachment effect, we obtain the lowest possible expected profit of the service provider.

Absolute and relative stability of loss aversion across contexts

Abstract: Individuals’ decisions under risk tend to be in line with the notion that “losses loom larger than gains”. This loss aversion in decision making is commonly understood as a stable individual preference that is manifested across different contexts. The presumed stability and generality, which underlies the prominence of loss aversion in the literature at large, has been recently questioned by studies showing how loss aversion can disappear, and even reverse, as a function of the choice context. The present study investigated whether loss aversion reflects a trait-like attitude of avoiding losses or rather individuals’ adaptability to different contexts. We report three experiments that investigated the within-subject context sensitivity of loss aversion in a two-alternative forced-choice task. The results show beside interindiviudal differences in loss aversion, that the context affects the extent of loss aversion. This indicates that even though the absolute value of loss aversion can be affected by external factors such as the choice context, estimates of people’s loss aversion still capture the relative dispositions towards gains and losses across individuals.

The relationship between the psychological distress derived from COVID-19 and the loss aversion is modulated by the alexithymia trait

Abstract: Studies on stress and decision-making usually address acute and artificial stressors. However, COVID-19 outbreak set the perfect scenarioto address how decision-making, and specifically loss aversion, could be affected by a real and persistent stressor, able to promote a significantpsychological distress. In parallel, alexithymia has been identified as a potential moderator of the loss aversion expression, since it could impairthe incorporation of emotional information when making a decision, leading to “cold” decisions. Through a within-subjects design (N = 70), ouraim was to study the relationship between the psychological distress caused by the pandemic context and the loss aversion changes, consideringalexithymia as a moderating factor. Our results show a significant increment in both psychological distress and loss aversion, merely one monthafter the confinement’s onset. Moreover, both variables were positively associated only when alexithymia was low, i.e., the alexithymia bufferedthe effect of psychological distress on decision-making: a higher alexithymia implied a lower loss aversion increase.

The reference dependence roots of inaction inertia: A query theory account

Abstract: Inaction inertia is the tendency to forego an opportunity after missing a significantly better opportunity. We show that inaction inertia is rooted in reference dependence. This is consistent with prior work finding that smaller discounts are devalued and inertia is motivated by avoidance of loss. We further illuminate the process by showing that consumers treat the missed discount (rather than the regular price) as a reference point relative to which a smaller discount feels like a loss. Missing a significantly better deal causes people to focus first and foremost on thoughts critical of the current deal. Notably, consumers who miss a smaller discount also construe the second deal as a loss, even if they take it. This research integrates inaction inertia and reference dependence theory using query theory analysis to contextualize inaction inertia with biases such as loss aversion, anchoring, and the default effect.

Posterior parietal cortex is causally involved in reward valuation but not probability weighting during risky choice

Abstract: This study provides evidence that the posterior parietal cortex (PPC) is causally involved in risky decision making via the processing of reward values but not reward probabilities. In the within-group experimental design, participants performed a binary lottery choice task following transcranial magnetic stimulation of the right PPC, left PPC and a right PPC sham (placebo) stimulation. Both, mean-variance and the prospect theory approach to risky choice showed that the PPC stimulation changed participants’ preferences towards greater risk aversion compared to sham. On the behavioral level, after the PPC stimulation the likelihood of choosing a safer option became more sensitive to the difference in standard deviations between lotteries, compared to sham, indicating greater risk avoidance within the meanvariance framework. We also estimated the shift in prospect theory parameters of risk preferences after PPC stimulation. The hierarchical Bayesian approach showed moderate evidence (BF = 7.44 and 5.41 for right and left PPC respectively) for a credible change in risk aversion parameter towards lower marginal reward value (and, hence, lower risk tolerance), while no credible change in probability weighting was observed. Additionally, we observed anecdotal evidence (BF = 2.9) for a credible increase in the consistency of responses after the left PPC stimulation compared to sham.

Time and risk preferences and the perceived effectiveness of incentives to comply with diabetic retinopathy screening among older adults with type 2 diabetes

Abstract: Behavioral economics has the potential to inform the design of incentives to improve disease screening programs by accounting for various behavioral biases. We investigate the association between multiple behavioral economics concepts and the perceived effectiveness of incentive strategies for behavioral change among older patients with a chronic disease. This association is examined by focusing on diabetic retinopathy screening, which is recommended but very variably followed by persons living with diabetes. Five time and risk preference concepts (i.e., utility curvature, probability weighting, loss aversion, discount rate, and present-bias) are estimated simultaneously in a structural econometric framework, based on a series of deliberately-designed economic experiments offering real money. We find that higher discount rates and loss aversion and lower probability weighting are significantly associated with lower perceived effectiveness of intervention strategies whereas present-bias and utility curvature have an insignificant association with it. Finally, we also observe strong urban vs. rural heterogeneity in the association between our behavioral economic concepts and the perceived effectiveness of intervention strategies.

Commuter departure time choice behavior under congestion charge: Analysis based on cumulative prospect theory

Abstract: An often-overlooked problem in the evaluation and prediction of congestion charge policies is commuters’ bounded rationality. Although some studies have sought to account for this using cumulative prospect theory (CPT), the specific behavioral parameters that reflect travelers’ decision-making process in response to congestion charge scenarios are based on assumptions and lack empirical evidence. This paper aims to provide empirical evidence to define the shape parameters in CPT—while accounting for systematic heterogeneity due to commuters’ characteristics—in order to build more realistic behavioral models for car commuters’ departure time choice behavior under congestion charge scenarios. A stated preference (SP) experiment with four time-based congestion charge scenarios is designed to obtain commuters’ departure time choices when facing uncertain travel conditions. A genetic algorithm (GA) is used to estimate the CPT coefficients that reflect car commuters’ cognitive biases under the congestion charge. The results suggest that commuters’ departure time choice under the congestion charge policy is consistent with the assumption of CPT. We find evidence of risk-averse and risk-taking behavior, loss aversion, and large distortion in probability weighting, and individuals’ personal and commuting characteristics had heterogeneous effects on CPT coefficients. The results shed light on travelers’ behavioral responses to congestion charge schemes and provide an important empirical reference.

Portfolio performance under benchmarking relative loss and portfolio insurance: From omega ratio to loss aversion

Abstract: Abstract We study an optimal investment problem under a joint limited expected relative loss and portfolio insurance constraint with a general random benchmark. By making use of a static Lagrangian method in a complete market setting, the optimal wealth and investment strategy can be fully determined along with the existence and uniqueness of the Lagrangian multipliers. Our numerical demonstration for various commonly used random benchmarks shows a trade-off between the portfolio outperformance and underperformance relative to the benchmark, which may not be captured by the widely used Omega ratio and its utility-transformed version, reflecting the impact of the benchmarking loss constraint. Furthermore, we develop a new portfolio performance measurement indicator that incorporates the agent’s utility loss aversion relative to the benchmark via solving an equivalent optimal asset allocation problem with a benchmark-reference-based preference. We show that the expected utility performance is well depicted by looking at this new portfolio performance ratio, suggesting a more suitable portfolio performance measurement under a limited loss constraint relative to a possibly random benchmark.

The ABC of algorithmic aversion: not agent, but benefits and control determine the acceptance of automated decision-making

Abstract: Abstract While algorithmic decision-making (ADM) is projected to increase exponentially in the coming decades, the academic debate on whether people are ready to accept, trust, and use ADM as opposed to human decision-making is ongoing. The current research aims at reconciling conflicting findings on ‘algorithmic aversion’ in the literature. It does so by investigating algorithmic aversion while controlling for two important characteristics that are often associated with ADM: increased benefits (monetary and accuracy) and decreased user control. Across three high-powered ( N total = 1192), preregistered 2 (agent: algorithm/human) × 2 (benefits: high/low) × 2 (control: user control/no control) between-subjects experiments, and two domains (finance and dating), the results were quite consistent: there is little evidence for a default aversion against algorithms and in favor of human decision makers. Instead, users accept or reject decisions and decisional agents based on their predicted benefits and the ability to exercise control over the decision.

A multi-period fuzzy portfolio optimization model with investors' loss aversion

Abstract: Abstract This paper considers the problem of how to construct the optimal multi-period portfolio for investor with loss aversion in fuzzy environment. Firstly, we regard the return rates of the risky assets as fuzzy numbers, and use the value function in prospect theory to transform the return rate of a portfolio into perceived value, which reflects investors' loss aversion. Moreover, due to the fact that investors' perception level toward risk may vary with the loss aversion degree, we propose a new risk measure based on the perceived value. Then, we formulate the objectives of maximizing the cumulative expected perceived value and minimizing the cumulative perceived risk, and propose a multi-period portfolio selection model with diversification constraint. Furthermore, to solve the proposed model, we design a multiple particle swarm optimization algorithm with respect to its specific situation. Finally, using the data from real financial market, we construct a real case to illustrate the effectiveness of the model and algorithm. The results show that loss aversion has an important effect in investors' investment decisions, and the proposed model could provide more reasonable strategies for investors with different loss aversion degrees.

The Prospect Theory and The Stock Market

Abstract: This paper is aimed to investigate the important principle of behavioral economics , prospect theory and applies prospect theory to stock market. Based on the former studies, there are three features at the core of prospect theory, and they are in turn the reference point, a principle of diminishing sensitivity and loss aversion. Prospect theory focus on how people make decisions in an uncertain situation and it combines psychology to research economic man's choice behavior rather than research rational people’s economic behavior like expected utility theory. Therefore, the prospect theory has more value and more practical to apply in the stock market and be studied to predict investors behavior. In this essay, case analysis method and theoretical analysis method will be used to explore the prospect theory and stock market. It found that prospect theory can conduct investors gain more profit because of stock reverse transaction strategy. And loss aversion, the most important factor of reversal effect, point out that when face the uncertainty, people won’t keep completely rational as the utility theory said. What’s more, it suggests the exist of reverse effect in Chinese stock market. The research contributed to present understanding of the prospect theory in China's stock market, and further explores that the stock reversal strategy is more conducive to investors' profits in China's stock market. A large part of the reasons for this phenomenon can be explained by prospect theory, while expected utility theory cannot.