Loss aversion

About: Loss aversion is a research topic. Over the lifetime, 2898 publications have been published within this topic receiving 115198 citations.

Loss aversion in a consumption-savings model

Abstract: We propose a model of consumption and saving based on Kahneman and Tversky's Prospect Theory that implies a fundamental asymmetry in consumption behavior inconsistent with other models of consumption. When there is sufficient income uncertainty, a person resists lowering consumption in response to bad news about future income. This resistance is greater than the resistance to increasing consumption in response to good news. We present empirical evidence from five countries that confirms this behavior.

Family Violence and Football: The Effect of Unexpected Emotional Cues on Violent Behavior

Abstract: Family violence is a pervasive and costly problem, yet there is no consensus on how to interpret the phenomenon of violence by one family member against another Some analysts assume that violence has an instrumental role in intra-family incentives Others argue that violent episodes represent a loss of control that the offender immediately regrets In this paper we specify and test a behavioral model of the latter form in which the strength of an emotional cue depends on outcomes relative to expectations and individuals exhibit loss aversion Our key hypothesis is that negative emotional cues -- benchmarked relative to a rationally expected reference point -- make a breakdown of control more likely We test this hypothesis using data on police reports of family violence on Sundays during the professional football season Controlling for location and time fixed effects, weather factors, the pre-game point spread, and the size of the local viewing audience, we find that upset losses by the home team (losses in games that the home team was predicted to win by more than 3 points) lead to an 8 percent increase in police reports of at-home male-on-female intimate partner violence There is no corresponding effect on female-on-male violence Consistent with the behavioral prediction that losses matter more than gains, upset victories by the home team have (at most) a small dampening effect on family violence We also find that unexpected losses in highly salient or frustrating games have a 50% to 100% larger impact on rates of family violence The evidence that payoff-irrelevant events affect the rate of family violence leads us to conclude that at least some fraction of family violence is better characterized as a breakdown of control than as an intra-family incentive system More generally, the empirical findings suggest that gain-loss utility with a rational reference point could be a useful approach to modeling other cues and visceral influences

How Basic Are Behavioral Biases? Evidence from Capuchin Monkey Trading Behavior

Abstract: Behavioral economics has demonstrated systematic decision‐making biases in both lab and field data. Do these biases extend across contexts, cultures, or even species? We investigate this question by introducing fiat currency and trade to a colony of capuchin monkeys and recovering their preferences over a range of goods and gambles. We show that capuchins react rationally to both price and wealth shocks but display several hallmark biases when faced with gambles, including reference dependence and loss aversion. Given our capuchins’ inexperience with money and trade, these results suggest that loss aversion extends beyond humans and may be innate rather than learned.

Amygdala damage eliminates monetary loss aversion

Abstract: Losses are a possibility in many risky decisions, and organisms have evolved mechanisms to evaluate and avoid them. Laboratory and field evidence suggests that people often avoid risks with losses even when they might earn a substantially larger gain, a behavioral preference termed “loss aversion.” The cautionary brake on behavior known to rely on the amygdala is a plausible candidate mechanism for loss aversion, yet evidence for this idea has so far not been found. We studied two rare individuals with focal bilateral amygdala lesions using a series of experimental economics tasks. To measure individual sensitivity to financial losses we asked participants to play a variety of monetary gambles with possible gains and losses. Although both participants retained a normal ability to respond to changes in the gambles’ expected value and risk, they showed a dramatic reduction in loss aversion compared to matched controls. The findings suggest that the amygdala plays a key role in generating loss aversion by inhibiting actions with potentially deleterious outcomes.

Aspects of Endowment: A Query Theory of Value Construction

Abstract: How do people judge the monetary value of objects? One clue is provided by the typical endowment study (D. Kahneman, J. L. Knetsch, & R. H. Thaler, 1991), in which participants are randomly given either a good, such as a coffee mug, that they may later sell ("sellers") or a choice between the good and amounts of cash ("choosers"). Sellers typically demand at least twice as much as choosers, inconsistent with economic theory. This result is usually explained by an increased weighting of losses, or loss aversion. The authors provide a memory-based account of endowment, suggesting that people construct values by posing a series of queries whose order differs for sellers and choosers. Because of output interference, these queries retrieve different aspects of the object and the medium of exchange, producing different valuations. The authors show that the content and structure of the recalled aspects differ for selling and choosing and that these aspects predict valuations. Merely altering the order in which queries are posed can eliminate the endowment effect, and changing the order of queries can produce endowment-like effects without ownership.