Loss aversion

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

The Bright Side of Loss Aversion in Dynamic and Competitive Markets

Abstract: A well-established phenomenon of consumer buying behavior is that consumers evaluate prices relative to a reference point and exhibit loss aversion; ie, their propensity to buy is more negatively affected by prices above the reference point than it is positively affected by prices below the reference point The objective of this paper is to analytically examine how the competitive strategy and profitability of firms are affected by the presence of consumer loss aversion in the price dimension Although we assume that consumer loss aversion increases consumer propensity to search for lower prices, we find that it does not necessarily lead to lower prices or profits when firms compete over multiple periods and when the consumer reference price in subsequent periods is affected by current prices Specifically, consumer loss aversion could lead to higher prices and profits when consumer valuation is sufficiently high relative to search costs and the proportion of consumers with positive search costs is in an intermediate range We also show that when forward-looking firms incorporate the negative effect of price promotions on future profits, the equilibrium range of price promotions may actually increase

Predicting Insurance Demand from Risk Attitudes

Abstract: Can measured risk attitudes and associated structural models predict insurance demand? In an experiment (n = 1,730), we elicit measures of utility curvature, probability weighting, loss aversion, and preference for certainty and use them to parameterize seventeen common structural models (e.g., expected utility, cumulative prospect theory). Subjects also make twelve insurance choices over different loss probabilities and prices. The insurance choices show coherence and some correlation with various risk-attitude measures. Yet all the structural models predict insurance poorly, often less accurately than random predictions. Simpler prediction heuristics show more promise for predicting insurance choices across different conditions.

Happiness and Loss Aversion: When Social Participation Dominates Comparison

Abstract: A central finding in happiness research is that a person's income relative to the average income in her social reference group is more important for her life satisfaction than the absolute level of her income. This dependence of life satisfaction on relative income can be related to the reference dependence of the value function in Kahneman and Tversky's (1979) prospect theory. In this paper we investigate whether the characteristics of the value function like concavity for gains, convexity for losses, and loss aversion apply to the dependence of life satisfaction on relative income. This is tested with a new measure for the reference income for a large German panel for the years 1984-2001. We find concavity of life satisfaction in positive relative income, but unexpectedly strongly significant concavity of life satisfaction in negative relative income as well. The latter result is shown to be robust to extreme distortions of the reported-life-satisfaction scale. It implies a rising marginal sensitivity of life satisfaction to more negative values of relative income, and hence loss aversion (in a wide sense). This may be explained in terms of increasing financial obstacles to social participation.

Impact of Behavioral Finance on Stock Investment Decisions Applied Study on a Sample of Investors at Amman Stock Exchange

Abstract: This study aims to explore the impact of a number of prominent behavioral finance variables covered by the financial literature (overconfidence, loss aversion, risk perception and herding) that may affect the stock investment decision-making at Amman Stock Exchange (ASE), as well as determining which of these variables has the relative importance. The importance of this study stems from the fact that local studies focusing on the issue of behavioral finance are rare and therefore, the researchers expect that such study will enrich awareness in this domain. The study consisted of 165 individual investors who were active in the trading halls at Amman Stock Exchange during the research period. The data were collected through a questionnaire prepared for the purpose of research and were analyzed by applying multiple statistical tests (Multiple regression and Hierarchal regression analysis) and by using statistical software (SPSS) after approving the reliability and validity of the questionnaire. The results showed that there was an impact of the behavioral finance at Amman Stock Exchange represented by three behavioral factors affecting the investment decisions of the individual investors which were: overconfidence, loss aversion, and herding, the results also showed that the variable overconfidence had the most relative significance. The research provided some recommendations for investors trading at ASE to adopt scientific bases in making stock investment decisions, and suggested to conduct further research to study the impact of behavioral finance on the different types of risks and yields at ASE.

Despairing Over Disparities: Explaining the Difference Between Willingness to Pay and Willingness to Accept

Abstract: This paper examines the three major explanations for the disparity between WTP and WTA observed in contingent value surveys and laboratory experiments: a belief that the results must be biased in some fashion, Hanemann's (1991) substitutes hypothesis, and the loss aversion model proposed by Tversky and Kahneman (1991). Starting from the assumption that individuals make utility maximizing choices, we develop structural equations that yield parametric tests of the hypotheses within a single, non-experimental framework. The approach is flexible enough to incorporate a variety of functional form and distributional assumptions and can be applied to either data from either open-ended bids or dichotomous choice questions.