Topic
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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TL;DR: In this paper, the authors extended the framework proposed by Barberis and Huang (2009) to incorporate narrow framing and loss aversion into dynamic models of portfolio choice and asset pricing to also account for probability weighting and for a value function that is convex on losses and concave on gains.
Abstract: This paper shows that the framework proposed by Barberis and Huang (2009) to incorporate narrow framing and loss aversion into dynamic models of portfolio choice and asset pricing can be extended to also account for probability weighting and for a value function that is convex on losses and concave on gains. We show that the addition of probability weighting and a convex-concave value function reinforces previous applications of narrow framing and cumulative prospect theory to understanding the stock market non-participation puzzle and the equity premium puzzle. Moreover, we show that a convex-concave value function generates new wealth eff ects that are consistent with empirical observations on stock market participation.
69 citations
TL;DR: The authors examined situations in which a decision maker decides for herself and another person under conditions of payoff equality, and compared them to individual decisions, and found that responsibility leaves utility curvature unaffected, but accentuates the subjective distortion of very small and very large probabilities for both gains and losses.
Abstract: Economic theory makes no predictions about social factors affecting decisions under risk. We examine situations in which a decision maker decides for herself and another person under conditions of payoff equality, and compare them to individual decisions. By estimating a structural model, we find that responsibility leaves utility curvature unaffected, but accentuates the subjective distortion of very small and very large probabilities for both gains and losses. We also find that responsibility reduces loss aversion, but that these results only obtain under some specific definitions of the latter. These results serve to generalize and reconcile some of the still largely contradictory findings in the literature. They also have implications for financial agency, which we discuss.
68 citations
TL;DR: This article investigated whether individuals' perceptions of risk are linked to variance aversion or loss aversion, and found that a link to loss aversion is supported by the psychology literature, whereas the finance literature tends to link risk to probability or size of potential losses.
68 citations
TL;DR: In this paper, the effects of loss aversion and scale compatibility on the utility of medical trade-offs were investigated. But the authors found that most participants do not behave consistently according to loss aversion or scale compatibility and that the effect of scale compatibility decreases with life duration.
68 citations
TL;DR: In this paper, the authors introduce a decision model of consumer inertia and find that consumer inertia has both positive and negative effects on profits: it decreases demand (in period one) but intensifies competition among consumers for the product(in period two), which is consistent with well-established behavioral regularities, such as loss aversion and probability weighting in the sense of prospect theory, and hyperbolic time preferences.
Abstract: This paper introduces a decision model of consumer inertia. Consumers exhibit inertia when they have an inherent bias to delay purchases. Inertia may induce consumers to wait even when it is optimal to buy immediately. We embed our decision model within a dynamic pricing context. There is a firm that sells a fixed capacity over two time periods to an uncertain number of both rational and inertial consumers. We find that consumer inertia has both positive and negative effects on profits: it decreases demand (in period one) but intensifies competition among consumers for the product (in period two). We show that our model of inertia is consistent with well-established behavioral regularities, such as loss aversion and probability weighting in the sense of prospect theory, and hyperbolic time preferences. We offer practical recommendations for firms to influence the level of consumer inertia. These include offering returns policies (to mitigate potential consumer losses), providing decision aids (to avoid perception errors), and offering flexible payment options (to lower transaction costs).
68 citations