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: The authors used both theory and simulation to show that prospect theory often predicts the disposition effect when lagged expected final wealth is the reference point under the principle of preferred personal equilibrium, regardless of whether a reference point is updated or not.
Abstract: There has been recent debate about whether prospect theory can explain the disposition effect. Using both theory and simulation, this paper shows that prospect theory often predicts the disposition effect when lagged expected final wealth is the reference point under the principle of preferred personal equilibrium, regardless of whether the reference point is updated or not. When initial wealth is the reference point, however, there is often no disposition effect. Models that use a reference point with no lag under the principle of preferred personal equilibrium or that determine the reference point using the principle of disappointment aversion cannot explain why the investor bought a stock in the first place. Reference point adjustment weakens the disposition effect, leads to more aggressive initial stock purchase strategies, and predicts history dependence in stock holding. This paper was accepted by John List, behavioral economics.
52 citations
TL;DR: The authors found that those who knew more about a particular car attribute (e.g., fuel economy) were less loss-averse for that attribute but not other attributes (i.e., comfort), consistent with the idea that people with less attribute knowledge are more likely to construct preferences, thereby increasing loss aversion.
52 citations
02 Oct 2008
TL;DR: In this article, a mathematical model based on Extended Prospect Theory was proposed to predict the responses of car owners in Singapore to the introduction and changes in the road pricing fares from 1975 to 2005.
Abstract: In Transport Sciences different implementations of Utility Theory are commonly used for the description and prediction of human choice behaviour. Almost 30 years ago Kahneman and Tversky proposed an alternative behavioural-economic model of choice behaviour called Prospect Theory. In contrast to Utility Theory they assumed that preference orders depend on the choice context. The most important differences between Extended Prospect Theory and Utility Theory are: preferences for one alternative over another are not stable but may change with the circumstances; people frame alternatives as changes compared to a reference state; they adapt that reference state almost immediately once a choice is made; and they attach a much higher value to a loss of, for example, ten minutes leisure time compared to an increase of the same size. This book demonstrates that in many occasions an Extended Prospect Theory explains the choice behaviour of people better than Utility Theory for the whole range of travel choice contexts. It also proposes a mathematical model based on Extended Prospect Theory that, compared to a similar Utility Theory-model, appeared to offer a better prediction of the responses of car owners in Singapore to the introduction and changes in the road pricing fares from 1975 to 2005.
52 citations
TL;DR: In this paper, a loss-averse investor equipped with a specific, but still quite general, utility function motivated by behavioral finance is considered and closed-form solutions for the investor's portfolio performance measure are derived under certain concrete assumptions concerning the form of this utility.
Abstract: In this paper we consider a loss-averse investor equipped with a specific, but still quite general, utility function motivated by behavioral finance. We show that, under certain concrete assumptions concerning the form of this utility, one can derive closed-form solutions for the investor's portfolio performance measure. We investigate the effects of loss aversion and demonstrate its important role in performance measurement. The framework presented in this paper also provides a sound theoretical foundation for all known performance measures based on partial moments of the distribution.
51 citations
TL;DR: The authors analyzed participants' facial expressions with facereading software before and while the market is operating and found that greater positive emotion in facial expressions before the market opens predicts higher prices and larger bubbles.
Abstract: We consider the relationship between the emotional state of traders and market prices. We create asset markets with the structure first studied by Smith, Suchanek and Williams (1988), which is known to generate price bubbles and crashes. We analyze participants' facial expressions with facereading software before and while the market is operating. We find that greater positive emotion in facial expressions before the market opens predicts higher prices and larger bubbles. Greater fear predicts lower prices and smaller bubbles. Those traders who remain the most neutral during periods of market volatility achieve the highest earnings. Loss aversion in decision making is correlated with fear, not with other emotions.
51 citations