Loss aversion

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

My Loss Is Your Loss … Sometimes: Loss Aversion and the Effect of Motivational Biases

Abstract: Findings from previous studies of individual decision-making behavior predict that losses will loom larger than gains. It is less clear, however, if this loss aversion applies to the way in which individuals attribute value to the gains and losses of others, or if it is robust across a broad spectrum of policy and management decision contexts. Consistent with previous work, the results from a series of experiments reported here revealed that subjects exhibited loss aversion when evaluating their own financial gains and losses. The presence of loss aversion was also confirmed for the way in which individuals attribute value to the financial gains and losses of others. However, similar evaluations within social and environmental contexts did not exhibit loss aversion. In addition, research subjects expected that individuals who were unknown to them would significantly undervalue the subjects' own losses across all contexts. The implications of these findings for risk-based policy and management are many. Specifically, they warrant caution when relying upon loss aversion to explain or predict the reaction of affected individuals to risk-based decisions that involve moral or protected values. The findings also suggest that motivational biases may lead decisionmakers to assume that their attitudes and beliefs are common among those affected by a decision, while those affected may expect unfamiliar others to be unable to identify and act in accordance with shared values.

Behavioural economics and financial services marketing: a review

Abstract: Purpose – It has been argued that the insights provided by behavioural economics have profound implications for the study and practice of marketing. The purpose of this paper is to provide a detailed analysis of how such insights help enhance understanding of aspects of marketing and consumer behaviour in financial services markets.Design/methodology/approach – This paper looks at various facets of behavioural economics which it is felt provide particularly important and salient insights in the context of financial services. In particular, it studies loss aversion and prospect theory, status quo bias and defaults, framing and anchoring effects, hyperbolic discounting, availability effect and salience and over‐confidence. In doing so, it provides a number of examples from the financial services context which provide insightful and informative insights for both commercial practitioners and policymakers. In each case, relevant phenomena are introduced and explained before providing a number of applications a...

Loss aversion and the quantity–quality tradeoff

Abstract: Firms face an optimization problem that requires a maximal quantity output given a quality constraint. But how do firms incentivize quantity and quality to meet these dual goals, and what role do behavioral factors, such as loss aversion, play in the tradeoffs workers face? We address these questions with a theoretical model and an experiment in which participants are paid for both quantity and quality of a real effort task. Consistent with basic economic theory, higher quality incentives encourage participants to shift their attention from quantity to quality. However, we also find that loss averse participants shift their attention from quality to quantity to a greater degree when quality is weakly incentivized. These results can inform managers of appropriate ways to structure contracts, and suggest benefits to personalizing contracts based on individual behavioral characteristics.

The Effect of Subtracting a Constant from all Payoffs in a Hawk‐Dove Game: Experimental Evidence of Loss Aversion in Strategic Behavior

Abstract: [Author Affiliation]Nick Feltovich, , , , n.feltovich@abdn.ac.uk[Acknowledgment]This research was partly funded by the University of Aberdeen Business School. I thank Miguel Costa-Gomes, Erika Seki, Joe Swierzbinski, and Qin Xiao for helpful suggestions and comments.1. BackgroundGame-theoretic solution concepts imply that a change in payoff levels--modifying a game by adding a constant to all payoffs--should not affect behavior as long as payoffs reflect players' preferences (i.e., they are equivalent to expected utilities). However, when the entries in a "payoff matrix" are actually monetary gains or losses, as in economics experiments with human subjects, the robustness of behavior to such changes becomes an empirical question. Research has found that payoff levels can indeed have an effect on behavior, particularly when the signs of payoffs change as a result: gains turn to losses or vice versa. Kahneman and Tversky (1979) document survey evidence suggesting that losses weigh more heavily than equally sized gains and name this phenomenon "loss aversion." Many examples of loss aversion in laboratory experiments and in the field have since been found (Camerer 2004); however, nearly all have involved individual decision-making tasks. By contrast, evidence of loss aversion in strategic decision making has been hard to find (see section 2 for a review).The objective of this article is to add to the discussion of whether, and how, strategic behavior is affected by differential treatment of gains and losses by reporting the strongest evidence I have seen thus far of such an effect in a strategic situation--specifically, results of a human subjects experiment involving two hawk-dove games (see Figure 1) played under either a fixed-pairs or a random-matching protocol.Figure 1The Hawk-Dove Games Used in the ExperimentI am agnostic about the source of the effect I find--whether it comes from loss aversion or some other phenomenon (such as loss avoidance described in section 2)--so to save space I will often abuse terminology somewhat by using "loss aversion" as a shorthand term for any pattern of behavior in which losses weigh more heavily than gains, irrespective of the underlying cause.12. Previous LiteratureHere I present a brief review of previous research into the effects of changing payoff levels (for a more thorough review, see Feltovich, Iwasaki, and Oda 2008). Ido Erev and colleagues have conducted several studies examining payoff-level effects in repeated individual-decision problems, typically finding that subjects are quicker to learn an optimal choice under limited payoff information when both gains and losses are possible than when only gains or only losses are possible.2 Erev, Bereby-Meyer, and Roth (1999) examined behavior in two versions of a repeated 2 × 2 constant-sum stage game with a unique Nash equilibrium in mixed strategies. Payoffs in the games differed only by subtraction of a constant, but one game had losses possible while the other did not. Erev, Bereby-Meyer, and Roth found that subject choices were more consistent with fictitious play learning (that is, more likely to optimize against the historical distribution of opponent choices) when losses were possible than when they were not. On the other hand, Rapoport and Boebel (1992) failed to find a payoff-level effect in two versions of a repeated 5 × 5 constant-sum game with a unique mixed-strategy equilibrium. Unlike Erev, Bereby-Meyer, and Roth, though, Rapoport and Boebel do not affect the signs of any payoffs with their manipulation of payoff levels, suggesting that not all payoff-level changes matter for behavior--only those that change the signs of payoffs.Another way of examining payoff-level effects is in market experiments in which subjects play the role of firms facing sunk costs that vary across treatments. …