Loss aversion

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

The Impact of the Behavioral Factors on Investment Decision-Making: A Systemic Review on Financial Institutions

Abstract: The purpose of the study is to identify the effects of behavioral factors (cognitive biases) on financial decision-making. A systematic review method was implemented and selected 29 research published studies between the years 2010-2020 and were critically reviewed. The main findings of the study indicate that the most common factors appear in papers were overconfidence (18), anchoring bias (11), herding effect (10) and loss aversion (9), which has a significant impact on the financial decision making process. Moreover, almost half of the articles were survey-based (questionnaire), quantitative method and the rest of the articles were the qualitative and mixed-methods. The study concluded that the overall impact of behavioral/psychological factors highly influence on financial decision-making. However, the time and search of the key terms in the papers’ title were considered as the key limitations, which prevent in-depth investigation of the study. For future research, those most repetitive cognitive bias should be measured during COVID-19 pandemic uncertain situation.

History-Dependent Risk Preferences: Evidence from Individual Choices and Implications for the Disposition Effect

Abstract: We use trading data from a sports wagering market to estimate individual risk preferences within the prospect-theory paradigm. The experimental-like features of this market greatly facilitate the estimation of risk preferences, while our long panel enables us to study whether preferences vary across individuals and depend on earlier outcomes. Our estimates i) extend support for existing experimental findings --- mild utility curvature, moderate loss aversion, and probability overweighting of extreme outcomes --- to a real market setting that shares similarities with traditional financial markets, ii) reveal that risk attitude is widely heterogeneous and history-dependent, and iii) indicate that prospect theory can better explain the prevalence of the disposition effect than previously thought.

Keeping your gains close but your money closer: The prepayment effect in riskless choices

Abstract: Although research on loss aversion now spans more than three decades, researchers are still debating whether (or in which cases) the finding holds true for money. We contribute to this debate by exploring how prepayment affects financial decisions. In one set of experiments, we show that when faced with a tradeoff between post- and prepayment, participants overvalue prepaid money, and sometimes even prefer it over objectively higher gains. Importantly, this effect was more pronounced when prepayment was more distant from its pure representation in dollars and cents (Experiment 1A), as well as when potential losses were directly linked to specific options (Experiment 1B). As far as the processes involved, our results suggest that prepayment leads to increased personal commitment to prepaid options (Experiment 1C). In a second set of experiments, we show that even when the tradeoff element is eliminated, participants are more motivated and engaged in a task that is prepaid rather than post-paid (Experiments 2A and 2B). Based on our findings, we discuss how firms can use prepayment mechanisms to get more out of their agents, and how individuals can be motivated to better utilize their money.

Understanding clinical and non-clinical decisions under uncertainty: a scenario-based survey.

Abstract: Prospect theory suggests that when faced with an uncertain outcome, people display loss aversion by preferring to risk a greater loss rather than incurring certain, lesser cost. Providing probability information improves decision making towards the economically optimal choice in these situations. Clinicians frequently make decisions when the outcome is uncertain, and loss aversion may influence choices. This study explores the extent to which prospect theory, loss aversion, and probability information in a non-clinical domain explains clinical decision making under uncertainty. Four hundred sixty two participants (n = 117 non-medical undergraduates, n = 113 medical students, n = 117 resident trainees, and n = 115 medical/surgical faculty) completed a three-part online task. First, participants completed an iced-road salting task using temperature forecasts with or without explicit probability information. Second, participants chose between less or more risk-averse (“defensive medicine”) decisions in standardized scenarios. Last, participants chose between recommending therapy with certain outcomes or risking additional years gained or lost. In the road salting task, the mean expected value for decisions made by clinicians was better than for non-clinicians(−$1,022 vs -$1,061; <0.001). Probability information improved decision making for all participants, but non-clinicians improved more (mean improvement of $64 versus $33; p = 0.027). Mean defensive decisions decreased across training level (medical students 2.1 ± 0.9, residents 1.6 ± 0.8, faculty1.6 ± 1.1; p-trend < 0.001) and prospect-theory-concordant decisions increased (25.4%, 33.9%, and 40.7%;p-trend = 0.016). There was no relationship identified between road salting choices with defensive medicine and prospect-theory-concordant decisions. All participants made more economically-rational decisions when provided explicit probability information in a non-clinical domain. However, choices in the non-clinical domain were not related to prospect-theory concordant decision making and risk aversion tendencies in the clinical domain. Recognizing this discordance may be important when applying prospect theory to interventions aimed at improving clinical care.