Loss aversion

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

The consistency of visual attention to losses and loss sensitivity across valuation and choice

Abstract: Sensitivity to losses has been found to vary greatly across individuals. One explanation for this variability is that for some losses garner more visual attention and are subsequently given more weight in decision-making processes. In three studies we examined whether biases in visual attention toward potential losses during valuation and choice were related to loss sensitivity, as well as the valuations provided and the choices made. In all studies, we find a positive relationship between estimated loss sensitivity and attention to losses for valuation, with increased attention to losses predicting decreased valuations. For choices, however, there was no robust relationship between attention and loss sensitivity or the choices made. In addition, preferences were not strongly consistent across tasks (i.e., valuations and choices did not robustly align), nor was the distribution of attention robustly related across tasks. Study 3 involved testing across separate sessions and found significant consistency in loss sensitivity and attention to losses across sessions for both choice and valuation. In sum, it appears that loss sensitivity varies across individuals, is differentially related to attention across tasks, and shows some consistency across time. Attention to losses also shows consistency across time, and its relationship with valuations appears much more robust than with choices; patterns of results that add to research suggesting that different cognitive processes underlie valuations and choices. (PsycINFO Database Record (c) 2018 APA, all rights reserved).

Testing for Reference Dependence: An Application to the Art Market

Abstract: This paper tests for reference dependence, using data from Impressionist and Contemporary Art auctions. We distinguish reference dependence based on 'rule of thumb' learning from reference dependence based on 'rational' learning. Furthermore, we distinguish pure reference dependence from effects due to loss aversion. Thus, we use actual market data to test essential characteristics of Kahneman and Tversky's Prospect Theory. The main methodological innovations of this paper are firstly, that reference dependence can be identified separately from loss aversion. Secondly, we introduce a consistent non-linear estimator to deal with measurement errors problems involved in testing for loss aversion. In this dataset, we find strong reference dependence but no loss aversion.

Myopic Loss Aversion: Information Feedback vs. Investment Flexibility

Abstract: We experimentally disentangle the effect of information feedback from the effect of investment flexibility on the investment behavior of a myopically loss averse investor. Our findings show that varying the information condition alone suffices to induce behavior that is in line with the hypothesis of Myopic Loss Aversion.

Prospect Theory Versus Expected Utility Theory: Assumptions, Predictions, Intuition and Modelling of Risk Attitudes

Abstract: The main focus of this tutorial/review is on presenting Prospect Theory in the context of the still ongoing debate between the behavioral (mainly descriptive) and the classical (mainly normative) approach in decision theory under risk and uncertainty. The goal is to discuss Prospect Theory vs. Expected Utility in a comparative way. We discuss: a) which assumptions (implicit and explicit) of the classical theory are being questioned in Prospect Theory; b) how does the theory incorporate robust experimental evidence, striving, at the same time, to find the right balance between the basic rationality postulates of Expected Utility (e.g. monotonicity wrt. First-Order Stochastic Dominance), psychological plausibility and mathematical elegance; c) how are risk attitudes modeled in the theory. In particular we discuss prospect stochastic dominance and the three-pillar structure of modeling risk attitudes in Prospect Theory involving: the non-additive decision weights with lower and upper subadditivity and their relationship to the notions of pessimism and optimism, as well as preferences towards consequences separated into preferences within and across the domains of gains and losses (corresponding to basic utility and loss aversion), d) example applications of Prospect Theory.

Similarities and differences between stockpiling and reference effects

Abstract: The correlation of past prices and demand is commonly attributed to reference effects. Although reference dependence is robust, support for loss aversion is mixed; some find demand more sensitive to price increases, consistent with loss aversion, others find no difference or greater sensitivity to price decreases. Stockpiling offers an explanation for these mixed findings. Combining theory, analytical models and simulations, stockpiling and reference dependence predict similar effects and the more stockable the product, the greater sensitivity of demand to price decreases, the opposite of loss aversion. We show that a model combining stockpiling and reference effects best aligns with previous findings and under what conditions each effect should dominate. Copyright © 2008 John Wiley & Sons, Ltd.