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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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Journal ArticleDOI
TL;DR: In this paper, the authors study the dynamic pricing implications of a new, behaviorally motivated reference price mechanism based on the peak-end memory mode, which suggests that consumers anchor on a reference price that is a weighted average of the lowest and most recent prices.
Abstract: We study the dynamic pricing implications of a new, behaviorally motivated reference price mechanism based on the peak-end memory mode. This model suggests that consumers anchor on a reference price that is a weighted average of the lowest and most recent prices. Loss-averse consumers are more sensitive to perceived losses than gains relative to this reference price. We find that a range of constant pricing policies is optimal for the corresponding dynamic pricing problem. This range is wider the more consumers anchor on lowest prices, and it persists when buyers are loss neutral, in contrast with previous literature. In a transient regime, the optimal pricing policy is monotone and converges to a steady-state price, which is lower the more extreme and salient the low-price anchor is. Our results suggest that behavioral regularities, such as peak-end anchoring and loss aversion, limit the benefits of varying prices, and caution that the adverse effects of deep discounts on the firm's optimal prices and profits might be more enduring than previous models predict.

157 citations

Journal ArticleDOI
TL;DR: In this paper, the authors investigated 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.

156 citations

Journal ArticleDOI
TL;DR: In this paper, a behavioral condition of loss aversion is proposed and tested and participants participated in experiments on binary choices among lotteries involving small scale real gains and losses, and a significant proportion of the choices are in the direction predicted by loss aversion.
Abstract: A behavioral condition of loss aversion is proposed and tested. Forty-nine students participated in experiments on binary choices among lotteries involving small scale real gains and losses. At the aggregate level, a significant proportion of the choices are in the direction predicted by loss aversion. Individuals can be classified as loss averse (28 participants), gain seeking (12), and unclassified (9). A comparison with risk behavior for binary choices on lotteries involving only gains shows that risk attitudes vary across these domains of lotteries. A gender effect is also observed: proportionally more women are loss averse. In contrast to the predictions of comonotonic independence, the size of common outcomes has systematic influence on choice behavior.

156 citations

Posted Content
TL;DR: In this paper, the authors show that loss aversion determines seller behavior in the housing market, and that owners subject to nominal losses set higher asking prices of 25-35 percent of the difference between the property's expected selling price and their original purchase price, and exhibit a much lower sale hazard than other sellers.
Abstract: Data from downtown Boston in the 1990s show that loss aversion determines seller behavior in the housing market. Condominium owners subject to nominal losses 1) set higher asking prices of 25-35 percent of the difference between the property's expected selling price and their original purchase price; 2) attain higher selling prices of 3-18 percent of that difference; and 3) exhibit a much lower sale hazard than other sellers. The list price results are twice as large for owner-occupants as investors, but hold for both. These findings are consistent with prospect theory and help explain the positive price-volume correlation in real estate markets.

155 citations

Journal ArticleDOI
TL;DR: Prospect theory was developed in the late 1970s by Kahneman and Tversky as discussed by the authors in response to accumulating evidence of systematic behavioral violations of expected-utility theory, and it is now a leading alternative to expected utility as a theory of choice under conditions of risk.
Abstract: Prospect theory deviates from expected-utility theory by positing that how people frame a problem around a reference point has a critical influence on their choices and that people tend to overweight losses with respect to comparable gains, to be risk-averse with respect to gains and risk- acceptant with respect to losses, and to respond to probabilities in a non- linear manner. This study examines these and related observed anomalies in expected-utility theory, summarizes how prospect theory integrates these anomalies into an alternative theory of risky choice, and explores some of the implications of prospect theory for international conflict and for bargain- ing and coercion in particular. One hypothesis is that political leaders of adversarial states behave differently when they are bargaining over gains than when they are bargaining over losses. Another is that crisis behavior may be more destabilizing than commonly predicted by rational choice theories because leaders are less willing to make concessions and more willing to risk large losses in the hope of eliminating small losses altogether. Prospect theory was developed in the late 1970s by Kahneman and Tversky (1979) in response to accumulating evidence of systematic behavioral violations of expected- utility theory. It is now a leading alternative to expected utility as a theory of choice under conditions of risk.1 Prospect theory is best known for its claims that people tend to overweight losses with respect to comparable gains, that they are generally risk-averse with respect to gains and risk-acceptant with respect to losses, that they respond to probabilities in a non-linear manner, and that how they frame a problem around a reference point has a critical influence on their choices. The theory gener- ates a rich and intriguing set of hypotheses about international relations, but attempts to apply the theory outside the highly controlled environment of the exper- imental laboratory are plagued by a number of difficult methodological problems (Jervis, 1992; Levy 1992b; Stein, 1992).

155 citations


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Performance
Metrics
No. of papers in the topic in previous years
YearPapers
2023105
2022178
2021178
2020184
2019189
2018197