Loss aversion

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

Risk, Uncertainty, and Entrepreneurship: Evidence from a Lab-in-the-Field Experiment

Abstract: Theory predicts that entrepreneurs have distinct attitudes toward risk and uncertainty, but empirical evidence is mixed. To better understand the unique behavioral characteristics of entrepreneurs and the causes of these mixed results, we perform a large "lab-in-the-field" experiment comparing entrepreneurs to managers a suitable comparison group and employees n = 2,288. The results indicate that entrepreneurs perceive themselves as less risk averse than managers and employees, in line with common wisdom. However, when using experimental incentivized measures, the differences are subtler. Entrepreneurs are only found to be unique in their lower degree of loss aversion, and not in their risk or ambiguity aversion. This combination of results might be explained by our finding that perceived risk attitude is not only correlated to risk aversion but also to loss aversion. Overall, we therefore suggest using a broader definition of risk that captures this unique feature of entrepreneurs: their willingness to risk losses. This paper was accepted by Uri Gneezy, behavioral economics.

Complementary Cognitive Capabilities, Economic Decision-Making, and Aging

Abstract: Fluid intelligence decreases with age, yet evidence about age declines in decision-making quality is mixed: Depending on the study, older adults make worse, equally good, or even better decisions than younger adults. We propose a potential explanation for this puzzle, namely that age differences in decision performance result from the interplay between two sets of cognitive capabilities that impact decision making, one in which older adults fare worse (i.e., fluid intelligence) and one in which they fare better (i.e., crystallized intelligence). Specifically, we hypothesized that older adults’ higher levels of crystallized intelligence can provide an alternate pathway to good decisions when the fluid intelligence pathway declines. The performance of older adults relative to younger adults therefore depends on the relative importance of each type of intelligence for the decision at hand. We tested this complementary capabilities hypothesis in a broad sample of younger and older adults, collecting a battery of standard cognitive measures and measures of economically important decision-making “traits” — including temporal discounting, loss aversion, financial literacy, and debt literacy. We found that older participants performed as well as or better than younger participants on these four decision-making measures. Structural equation modeling verified our hypothesis: Older participants’ greater crystallized intelligence offset their lower levels of fluid intelligence for temporal discounting, financial literacy, and debt literacy, but not for loss aversion. These results have important implications for public policy and for the design of effective decision environments for older adults.

Explaining the endowment effect through ownership: The role of identity, gender, and self-threat

Abstract: The price people are willing to pay for a good is often less than the price they are willing to accept to give up the same good, a phenomenon called the endowment effect. Loss aversion has typically accounted for the endowment effect, but an alternative explanation suggests that ownership creates an association between the item and the self, and this possession-self link increases the value of the good. To test the ownership account, this research examines three moderators that theory suggests should affect the possession-self link and consequently the endowment effect: self-threat, identity associations of a good, and gender. After a social self-threat, the endowment effect is strengthened for in-group goods among both men and women but is eliminated for out-group goods among men (but not women). These results are consistent with a possession-self link explanation and therefore suggest that ownership offers a better explanation for the endowment effect.

Binary payment schemes: Moral hazard and loss aversion

Abstract: We modify the principal-agent model with moral hazard by assuming that the agent is expectation-based loss averse according to K o szegi and Rabin (2006, 2007). The optimal contract is a binary payment scheme even for a rich performance measure, where standard preferences predict a fully contingent contract. The logic is that, due to the stochastic reference point, increasing the number of different wages reduces the agent’s expected utility without providing strong additional incentives. Moreover, for diminutive occurrence probabilities for all signals the agent is rewarded with the fixed bonus if his performance exceeds a certain threshold.