Loss aversion

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

Strategic loan defaults and coordination: An experimental analysis

Abstract: This paper experimentally studies the impact of bank and borrower fundamentals on loan repayment. We find that solvent borrowers are more likely to default strategically when the bank’s expected strength is low, although loan repayment is a Pareto dominant Nash equilibrium. Borrowers are also less likely to repay when other borrowers’ expected repayment capacity is low, regardless of banks’ fundamentals. We show that changes in expectations about bank and borrower fundamentals change the risk dominance properties of the borrowers’ coordination problem, and that these changes subsequently explain strategic defaults. For the individual borrower, loss aversion and negative past experiences reduce repayment, suggesting that bank failure can be contagious in times of distress.

Optimal Asset Allocation Under Linear Loss Aversion

Abstract: Growing experimental evidence suggests that loss aversion plays an important role in asset allocation decisions. We study the asset allocation of a linear loss-averse (LA) investor and compare the optimal LA portfolio to the more traditional optimal mean-variance (MV) and conditional value-at-risk (CVaR) portfolios. First we derive conditions under which the LA problem is equivalent to the MV and CVaR problems. Then we analytically solve the twoasset problem, where one asset is risk-free, assuming binomial or normal asset returns. In addition we run simulation experiments to study LA investment under more realistic assumptions. In particular, we investigate the impact of different dependence structures, which can be of symmetric (Gaussian copula) or asymmetric (Clayton copula) type. Finally, using 13 EU and US assets, we implement the trading strategy of an LA investor assuming assets are reallocated on a monthly basis and find that LA portfolios clearly outperform MV and CVaR portfolios.

Loss aversion and duration of residence

Abstract: BACKGROUNDStudies of internal migration ask who moves, why they move, and what are the consequences − to themselves, their origin, and their destination. By contrast, studies of those who stay for very long durations are less common, despite the fact that most people move relatively infrequently. OBJECTIVEWe argue that staying is the dominant, preferred state and that moving is simply an adjustment toward a desired state of stability (or equilibrium). The core of our argument, already recognized in the literature, is that migration is risky. However, we extend the argument to loss aversion as developed within prospect theory. Prospect theory posits that existing possessions, including the dwelling and existing commodities, are attributed a value well beyond their purchase price and that this extends the average period of staying among the loss-averse. METHODSApplying prospect theory has several challenges, including measurement of the reference point and potential degrees of gain and loss households face in deciding to change residence, as well as their own degree of loss aversion. The growing number of large panel sets should make it possible to estimate the degree to which endowment effects are likely to extend durations of residence as predicted by prospect theory. CONCLUSIONSRational expectations models of mobility focus on the changes in the level of consumption of residential services. By contrast, prospect theory focuses on potential gains and losses relative to the existing dwelling − the reference point. As we confront increasing durations of residence in contemporary society, an application of prospect theory is likely to yield important advantages over existing models of mobility and staying.

Prospect Theory and Trading Patterns

Abstract: Reference dependence, loss aversion, and risk seeking for losses together comprise the preference-based component of prospect theory that sets its value function apart from the standard risk-aversion model. Using an elasticity analysis, we show that this distinctive preference component serves to underpin negative-feedback trading propensities, but cannot manifest itself in behavior directly or holistically at the individual-choice level. We then propose and demonstrate that the market interaction between prospect-theory investors and regular CRRA investors allows this preference component to dominate in equilibrium behavior and hence helps to reestablish the intuitive link between prospect-theory preferences and negative-feedback trading patterns. In the model, the interaction also reconciles the contrarian behavior of prospect-theory investors with asymmetric volatility and short-term return reversal. The results suggest that prospect-theory preferences can lead investors to behave endogenously as contrarian noise traders in the market interaction process.

Integrating loss aversion into a technology acceptance model to assess the relationship between website quality and website user's behavioural intentions

Abstract: Incorporating the loss aversion concept into the technology acceptance model (TAM), this paper endeavours to investigate the relationship between website quality and website user's behavioural intentions in the travel agency sector. A statistical analysis of the collected questionnaires was computed based on the 1279 usable responses from the selected websites of travel agencies. Structural equation modelling is the essential analysis methodology used to examine the hypothesised relationships among the variables. Joining the loss aversion concept, the results indicate that a decrease in website quality from the website user's expectation will decrease the perceived use of ease and usefulness towards the website and then influence website user's behavioural intentions, but that an increase in website quality has no significant effects on these two TAM constructs. The results also suggest that perceived ease of use, perceived usefulness, and attitude are acting as important mediators within the model. This ...