Topic
Loss aversion
About: Loss aversion is a research topic. Over the lifetime, 2898 publications have been published within this topic receiving 115198 citations.
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TL;DR: Reference-dependent theory of riskless choice assumes that carriers of utility are gains and losses relative to a reference point and that individuals are loss averse, i.e. losses are valued more highly than gains as discussed by the authors.
Abstract: Reference-dependent theory of riskless choice assumes that carriers of utility are gains and losses relative to a reference point and that individuals are loss averse, i.e. losses are valued more highly than gains. Reference-dependent money measures of the attributes in the utility functions are defined: the willingness to pay, the willingness to accept, the equivalent gain and the equivalent loss. Experimental evidence has been provided which supports reference-dependent theory for riskless route choice. A natural next development is the application of the theory to network analysis. This is an under-researched area. In the paper, the multi-class reference-dependent stochastic user equilibrium (RDSUE) problem under the status-quo assumption for the reference point is formulated. Conditions that guarantee the properties of existence and uniqueness of RDSUE are considered. The property of reflexivity of RDSUE is also considered to verify if the equilibrium is maintained when the reference point is updated to the new status quo. A methodology for the reference-dependent valuation of travel time changes over a network is provided. Data from a survey are used to estimate a reference-dependent route choice model and the attendant reference-dependent values of time. The estimation results are in agreement with econometric literature supporting loss aversion. The application to the case of a town bypass with toll illustrates the reference-dependent approach to network analysis and the implications of its use for policy making. It is shown that, if the interventions on the supply are phased, it is possible to exploit loss aversion and obtain advantages in terms of toll revenues and travel time spent.
20 citations
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TL;DR: In this article, the authors show that CPT investors favor a simple terminal wealth guarantee compared to more complex ratchet and cliquet guarantees, which can be explained by probability weighting alone.
Abstract: It is well known that cumulative prospect theory (CPT) can explain a demand for guarantees in investment products. This observation motivates us to study what type of guarantee observed in real–world insurance markets is most attractive to CPT investors. We find that CPT investors favor a simple terminal wealth guarantee compared to more complex ratchet and cliquet guarantees. To obtain this result we determine the optimal specifications of these contracts to CPT investors by means of an extensive simulation study. Optimization further allows to study the desired guarantee level (which is determined endogeneously from preferences), and illustrates what elements of CPT drive the demand for guarantees. CPT investors either desire a guarantee level equal to their reference point or insurance against large losses only. Such a crash insurance can be explained by probability weighting alone, i.e., even in the absence of loss aversion.
20 citations
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23 Sep 2017TL;DR: In this article, the relative effectiveness of contracts that are framed either in terms of bonuses or penalties was studied, and it was shown that effort provision is statistically indistinguishable under bonus and penalty contracts.
Abstract: We study the relative effectiveness of contracts that are framed either in terms of bonuses or penalties. In one set of treatments, subjects know at the time of effort provision whether they have achieved the bonus/avoided the penalty. In another set of treatments, subjects only learn the success of their performance at the end of the task. We fail to observe a contract framing effect in either condition: effort provision is statistically indistinguishable under bonus and penalty contracts.
20 citations
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TL;DR: This paper analyzed the relationship between ratings and review sentiment by introducing the tenets of prospect theory and found that negative deviations in ratings bring about a higher impact on review sentiment than positive deviations of equal magnitude (receiving a service with better performance than expected), thus, confirming loss aversion.
20 citations
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TL;DR: This paper found that people use both directed and random exploration regardless of whether they are exploring to maximize gains or minimize losses, and that there is quantitative agreement between the exploration parameters across domains.
Abstract: Many decisions in everyday life involve a choice between exploring options that are currently unknown and exploiting options that are already known to be rewarding Previous work has suggested that humans solve such ``explore-exploit'' dilemmas using a mixture of two strategies: directed exploration, in which information seeking drives exploration by choice, and random exploration, in which behavioral variability drives exploration by chance One limitation of this previous work was that, like most studies on explore-exploit decision making, it focused exclusively on the domain of gains, where the goal was to maximize reward In many real-world decisions, however, the goal is to minimize losses and it is well known from Prospect Theory that behavior can be quite different in this domain In this study, we compared explore-exploit behavior of human subjects under conditions of gain and loss We found that people use both directed and random exploration regardless of whether they are exploring to maximize gains or minimize losses and that there is quantitative agreement between the exploration parameters across domains Our results also revealed an overall bias towards the more uncertain option in the domain of losses While this bias towards uncertainty was qualitatively consistent with the predictions of Prospect Theory, quantitatively we found that the bias was better described by a Bayesian account, in which subjects had a prior that was optimistic for losses and pessimistic for gains Taken together, our results suggest that explore-exploit decisions are driven by three independent processes: directed and random exploration, and a baseline uncertainty seeking that is driven by a prior
20 citations