Loss aversion

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

Decision making in the Balloon Analogue Risk Task (BART): Anterior cingulate cortex signals loss aversion but not the infrequency of risky choices

Abstract: The inferior frontal gyrus/anterior insula (IFG/AI) and anterior cingulate cortex (ACC) are key regions involved in risk appraisal during decision making, but accounts of how these regions contribute to decision making under risk remain contested. To help clarify the roles of these and other related regions, we used a modified version of the Balloon Analogue Risk Task (Lejuez et al., Journal of Experimental Psychology: Applied, 8, 75–84, 2002) to distinguish between decision-making and feedback-related processes when participants decided to pursue a gain as the probability of loss increased parametrically. Specifically, we set out to test whether the ACC and IFG/AI regions correspond to loss aversion at the time of decision making in a way that is not confounded with either reward-seeking or infrequency effects. When participants chose to discontinue inflating the balloon (win option), we observed greater ACC and mainly bilateral IFG/AI activity at the time of decision as the probability of explosion increased, consistent with increased loss aversion but inconsistent with an infrequency effect. In contrast, we found robust vmPFC activity when participants chose to continue inflating the balloon (risky option), consistent with reward seeking. However, in the cingulate and in mainly bilateral IFG regions, blood-oxygenation-level-dependent activation decreased when participants chose to inflate the balloon as the probability of explosion increased, findings that are consistent with a reduced loss aversion signal. Our results highlight the existence of distinct reward-seeking and loss-averse signals during decision making, as well as the importance of distinguishing between decision and feedback signals.

Using Cumulative Prospect Theory to Explain Anomalous Crop Insurance Coverage Choice

Abstract: Farmers’ decisions about how much crop insurance to buy are not generally consistent with expected utility maximization. Taking into account both marginal risk benefits and marginal subsidy effects suggests that most farmers have chosen lower coverage levels than would be predicted by standard models. By modeling financial outcomes as gains and losses, cumulative prospect theory offers an alternative framework to perhaps better understand farmers’ purchase decisions. The role of the reference point that defines outcomes as either a gain or a loss, the degree of loss aversion, curvature of the value function, and the probability weighting function in determining optimal crop insurance coverage levels are explored for three representative farms calibrated to 2009 conditions. Loss aversion and how crop insurance is framed through choice of the reference point are shown to be the key factors that determine whether predictions from prospect theory are consistent with observed crop insurance coverage choices. When crop insurance is framed as a tool to manage farm risk then optimal choices under prospect theory are not consistent with observed choices. If crop insurance is framed as a stand‐alone investment where a loss is felt if the indemnity received is less than the premium paid, then prospect theory can generate optimal coverage level choices that are largely consistent with observed decisions. This result is shown to be robust to changes in parameterizations as long as loss aversion is maintained and if curvature of the value function is accompanied by decision weights that overweight low probability outcomes.

The Effect of Explicit Reference Points on Consumer Choice and Online Bidding Behavior

Abstract: Sellers often explicitly suggest to buyers that they compare one option to other reference options. Building on the notion that loss aversion is more pronounced when comparisons are explicit rather than implicit, we propose that the mere fact that consumers are explicitly told to make particular comparisons induces more risk-averse, cautious choice and bidding behavior. This proposition was supported in a field experiment involving real online auctions, in which comparisons among listings either were done spontaneously by bidders or were encouraged using an explicit instruction to compare the focal auction with adjacent listings. Results showed that explicit reference points 1 diminished the influence of adjacent auction prices on the focal auction's price; 2 led participants to submit fewer, lower, and later bids; 3 increased the incidence of sniping; 4 decreased bidding frenzy; and 5 decreased the tendency to bid on multiple items simultaneously. The impact of explicit comparisons on risk-averse behavior was further tested in a very different context using a laboratory choice experiment. In that study, explicit instructions to compare option sets increased the tendency to choose the compromise, low-risk, and all-average alternatives. We discuss the theoretical and practical implications of this research.

Expected utility or prospect theory maximisers? Assessing farmers' risk behaviour from field-experiment data

Abstract: We elicit the risk preferences of a sample of French farmers in a field-experiment setting, considering both expected utility and cumulative prospect theory. Under the EU framework, our results show that farmers are characterised by a concave utility function for gain outcomes implying risk aversion. The CPT framework confirms this result, but also suggests that farmers are twice as sensitive to losses as to gains and tend to pay undue attention to unlikely extreme outcomes. Accounting for loss aversion and probability weighting can make a difference in the design of effective and efficient policies, contracts or insurance schemes.