Loss aversion

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

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.

Prospect Theory or Skill Signaling

Abstract: Failure is embarrassing. In gambles involving both skill and chance, we show that a strategic desire to avoid appearing unskilled generates behavioral anomalies that are typically explained by prospect theory's concepts of loss aversion, probability weighting, and framing effects. Loss aversion arises because losing any gamble, even a friendly bet with little or no money at stake, reflects poorly on the decision maker's skill. Probability weighting emerges because winning a gamble with a low probability of success is a strong signal of skill, while losing a gamble with a high probability of success is a strong signal of incompetence. Framing matters when there are multiple equilibria and the framing of a gamble affects beliefs, e.g., when someone takes a "dare" rather than admit a lack of skill. The analysis is based on models from the career concerns literature and is closely related to early social psychology models of risk taking. The results provide an alternative perspective on the existence of prospect theory behavior in managerial and financial decisions where both skill and chance are important. We identify specific situations where skill signaling makes opposite predictions than prospect theory, allowing for tests between the strategic and behavioral approaches to understanding risk.

Loss-averse preferences in a two-echelon supply chain with yield risk and demand uncertainty

Abstract: We consider a one-period two-echelon supply chain composed of a loss-averse supplier with yield randomness and a loss-averse retailer with demand uncertainty. At the beginning of the selling season, the retailer orders from the supplier via the wholesale price contract, and then the supplier makes his production decision. We derive the loss-averse retailer’s optimal ordering policy and the loss-averse supplier’s optimal production policy under these conditions. In addition, we discuss the effect of loss aversion on both parties’ decision making and show how loss aversion contributes to decision bias. Furthermore, we find that the loss-averse retailer’s optimal order quantity may increase in wholesale price and decrease in retail price which is differ from the risk-neutral case where the optimal order quantity is always decreasing in wholesale price and increasing in retail price. Finally, numerical examples are presented to illustrate how loss aversion and yield variance contribute to the supply chain performance.

Deciding When to Quit: Reference-Dependence over Slot Machine Outcomes

Abstract: We conduct tests for reference dependent loss aversion using slot machine gamblers' decisions on when to quit playing for a visit to a casino. Evidence for a lagged status-quo reference po...

Activation of the DLPFC Reveals an Asymmetric Effect in Risky Decision Making: Evidence from a tDCS Study.

Abstract: The phenomenon of loss aversion (the tendency for losses to have a greater impact than comparable gains) has long been observed in daily life. Neurocognitive studies and brain imaging studies have shed light on the correlation between the phenomenon of loss aversion and the brain region of the prefrontal cortex. Recent brain stimulation studies using bilateral transcranial magnetic stimulation or transcranial direct current stimulation (tDCS) have obtained various results showing the causal relationship between brain regions and decision making. With the goal of studying whether unilateral stimulation can change participants' risky decision making in the frames of gains and losses, we applied different polarities of tDCS over the regions of the right or left prefrontal cortex. We also designed a risk measurement table (Multiple Price List) to reflect the participants' attitudes toward risky decision making via the crossover point including the frames of gains and losses. The results of our experiment indicated that the participants tended to be more risk averse in the gain frame after receiving left anodal tDCS and more risk seeking in the loss frame after receiving right cathodal tDCS, which was consistent with the hypothesis that the process of risky decision making was correlated with the interaction of multiple systems in the brain. Our conclusion revealed an asymmetric effect of right/left DLPFC when the participants faced gains and losses, which partially provided the neural evidence and a feasible paradigm to help better understand risky decision making and loss aversion. The current study can not only expand the traditional understanding of the behavioral preferences of humans in economics but also accommodate empirical observations of behavioral economists on the preferences of humans.