Loss aversion

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

Emotion regulation reduces loss aversion and decreases amygdala responses to losses

Abstract: Emotion regulation strategies can alter behavioral and physiological responses to emotional stimuli and the neural correlates of those responses in regions such as the amygdala or striatum. The current study investigates the brain systems engaged when using an emotion regulation technique during financial decisions. In decision making, regulating emotion with reappraisal-focused strategies that encourage taking a different perspective has been shown to reduce loss aversion as observed both in choices and in the relative arousal responses to actual loss and gain outcomes. In the current study, we find using fMRI that behavioral loss aversion correlates with amygdala activity in response to losses relative to gains. Success in regulating loss aversion also correlates with the reduction in amygdala responses to losses but not to gains. Furthermore, across both decisions and outcomes, we find the reappraisal strategy increases baseline activity in dorsolateral and ventromedial prefrontal cortex and the striatum. The similarity of the neural circuitry observed to that seen in emotion regulation, despite divergent tasks, serves as further evidence for a role of emotion in decision making, and for the power of reappraisal to change assessments of value and thereby choices.

Alternative Models for Capturing the Compromise Effect

Abstract: The compromise effect denotes the finding that brands gain share when they become the intermediate rather than an extreme option in a choice set (Simonson 1989). Despite the robustness and importance of this phenomenon, choice modelers have neglected to incorporate the compromise effect within formal choice models and to test whether such models outperform the standard value maximization model. In this article, we suggest four context-dependent choice models that can conceptually capture the compromise effect. Although these models are motivated by theory from economics and behavioral decision research, they differ with respect to the particular mechanism that underlies the compromise effect (e.g., contextual concavity vs. loss aversion). Using two empirical applications, we (1) contrast the alternative models and show that incorporating the compromise effect by modeling the local choice context leads to superior predictions and fit relative to the traditional value maximization model and a stronger (naive) model that adjusts for possible biases in utility measurement; (2) generalize the compromise effect by demonstrating that it systematically affects choice in larger sets of products and attributes than previously shown; (3) show the theoretical and empirical equivalence of loss aversion and local (contextual) concavity; and (4) demonstrate the superiority of models that use a single reference point over "tournament models" in which each option serves as a reference point. We discuss the theoretical and practical implications of this research, as well as the ability of the proposed models to predict other behavioral context effects.

A new explanation for the difference between time trade-off utilities and standard gamble utilities.

Abstract: This paper gives a new explanation for the systematic disparity between standard gamble (SG) utilities and time trade-off (TTO) utilities. The common explanation, which is based on expected utility, is that the disparity is caused by curvature of the utility function for duration. This explanation is, however, incomplete. People violate expected utility and these violations lead to biases in SG and TTO utilities. The paper analyzes the impact on SG and TTO utilities of three main reasons why people violate expected utility: probability weighting, loss aversion, and scale compatibility. In the SG, the combined effect of utility curvature, probability weighting, loss aversion, and scale compatibility is an upward bias. In the TTO these factors lead both to upward and to downward biases. This analysis can also explain the tentative empirical finding that the TTO better describes people's preferences for health than the SG.

Looking for Loss Aversion in Scanner Panel Data: The Confounding Effect of Price Response Heterogeneity

Abstract: Recent work in marketing has drawn on behavioral decision theory to advance the notion that consumers evaluate attributes (and therefore choice alternatives) not only in absolute terms, but asdeviations from a reference point. The theory has important substantive and practical implications for the timing and execution of price promotions and other marketing activities.Choice modelers using scanner panel data have tested for the presence of these "reference effects"in consumer response to an attribute such as price. In applications of the theory of reference-dependent choice (Tversky and Kahneman 1991), some modelers report empirical evidence of loss aversion: When a consumer encounters a price above his or her established reference point (a "loss"), the response is greater than for a price below the reference point (a "gain"). Researchers have gone so far as to suggest that evidence for the so-called reference effect make it an empirical generalization in marketing (e.g., Kalyanaram and Winer 1995, Meyer and Johnson 1995).It is our contention that the measurement of loss aversion in empirical applications of the reference-dependent choice model is confounded by the presence of unaccounted-for heterogeneity in consumer price responsiveness. Our reasoning is that the kinked price response curve implied by loss aversion is confounded with the slopes of the response curves across segments that are differentially responsive to price. A more price-responsive consumer (with a steeper response function) tends to have a lower price level as a reference point. This consumer faces a larger proportion of prices above his reference point, thus the response curve is steeperin the domain of losses. Similarly, the less price-responsive consumer sees a greater proportion of prices below his reference point, so the response curve is less steep within the domain of gains. As a result, any cross-sectional estimate of loss aversion that does not take this into account will be biased upward--researchers who do not control for heterogeneity in price responsiveness may arrive at incorrect substantive conclusions about the phenomenon. It is interesting to note that in this instance, failure to control for heterogeneity induces a bias infavor of finding an effect, rather than the more typical case of attenuation of the effect toward zero.We first test our assertion regarding the referencedependent model using scanner panel data on refrigerated orange juice and subsequently extend this analysis to 11 additional product categories. In all cases we find, as predicted, that accounting for price-response heterogeneity leads to lower and frequently nonsignificant estimates of loss aversion. We do, however, find some categories in which the effect does not disappear altogether. We also estimate loss aversion using a "sticker shock" model of brand choice in which the reference prices arebrand-specific. In line with the results of the majority of prior literature, we find smaller and insignificant estimates of loss aversion in this model. We show that this is because in the sticker shock model, there is no apparent correlation between the price responsiveness of the consumer and the representation of reference effects as losses or gains. Our findings strongly suggest that loss aversion may not in fact be a universal phenomenon, at least in the context of frequently purchased grocery products.

Nominal Loss Aversion, Housing Equity Constraints, and Household Mobility: Evidence from the United States

Abstract: This paper exploits the significant recent variation in U.S. house prices to empirically examine the effect on housing equity constraints and nominal loss aversion on household mobility. The analysis uses unique, detailed data from 1985-1996 on household characteristics, mobility, and wealth from the National Longitudinal Survey of Youth (NLSY79) matched with house price data from 149 metropolitan areas to estimate semi-parametric proportional hazard models of intra- and inter-metropolitan mobility. There are five principal findings. First, household intra-metropolitan own-to-own mobility responds differently to nominal housing losses than to gains. Second, nominal loss aversion is significantly less pronounced in intra-metropolitan own-to-rent and inter-metropolitan mobility, respectively. Third, there is some evidence of binding equity constraints in intra-metropolitan own-to-own mobility. Fourth, there is little evidence that low equity constrains intra-metropolitan own-to-rent and inter-metropolitan mobility, respectively. Fifth, a comparison of the estimated effects indicates that nominal loss aversion has a more dominant effect than equity constraints in restricting household mobility: roughly two-and-a-half to three times the impact of equity constraints.