Loss Aversion (loss + aversion)

Distribution by Scientific Domains
Distribution within Business, Economics, Finance and Accounting


Selected Abstracts


The Prospects for Prospect Theory: An Empirical Evaluation of International Relations Applications of Framing and Loss Aversion

POLITICAL PSYCHOLOGY, Issue 3 2004
William A. Boettcher III
International relations theorists have tried to adapt prospect theory to make it relevant to the study of real-world decision-making and testable beyond the constraints of the laboratory. Three experiments with undergraduate samples were conducted in an effort to clarify the advantages and limitations of prospect theory as adapted to explain political behavior. The first experiment tested hypotheses regarding the impact of prospect framing on group polarization, but these were only weakly supported. The second and third experiments examined alternative adaptations of the concept of framing; the results suggest that the political science expansion of the concept of framing may, under certain conditions, produce clear and robust preference reversals. [source]


How beliefs influence the relative magnitude of pleasure and pain

JOURNAL OF BEHAVIORAL DECISION MAKING, Issue 4 2010
Barbara A. Mellers
Abstract Loss aversion is an economic assumption about utility,people value giving up a good more than they value getting it. It also has hedonic meaning,the pain of a loss is greater in magnitude than the pleasure of a comparable gain. But value and pleasure are not necessarily identical. We test the hedonic interpretation of loss aversion in experimental markets. With hedonic forecasts, sellers imagine the pain of losing their endowment, and buyers imagine the pleasure of being endowed. With hedonic experiences, sellers rate the pleasure of having the endowment, and buyers rate the pain of being without it. Contrary to loss aversion, predicted pleasure is greater in magnitude than predicted pain, and experienced pleasure surpasses experienced pain. We show that the relative magnitude of pleasure and pain depends on beliefs about the likelihood of outcomes, as well as utilities. Surprise makes gains more pleasurable and losses more painful. With surprising gains and expected losses, pleasure can surpass pain. But when gains and losses are equally likely (or losses are surprising and gains are expected), the opposite pattern can occur. Finally, within-group and between-group prices are significantly correlated with hedonic experiences. Sellers who feel better with their endowments assign higher selling prices, and buyers who feel worse about the absence of endowment assign higher buying prices. Despite the fact that hedonic experiences deviate from loss aversion, these emotions predict the endowment effect. Copyright © 2009 John Wiley & Sons, Ltd. [source]


Opportunism in Capital Budget Recommendations: The Effects of Past Performance and Its Attributions,

DECISION SCIENCES, Issue 3 2001
Joanna L. Ho
Abstract This study uses an experiment to examine the separate and combined effects of managers' loss aversion and their causal attributions about their divisions' performance on tendencies to make goal-incongruent capital budget recommendations. We find that managers' recommendations are biased by their loss aversion. In particular, managers of high-performing divisions are more likely than managers of low-performing divisions to propose investments that maximize their division's short-term profits at the expense of the firm's long-term value. We also find that managers' recommendations are biased by their causal attributions. In particular, managers are more likely to propose investments that maximize their division's short-term profits at the expense of the firm's long-term value when they attribute their division's performance to external causes (e.g., task difficulty or luck) rather than to internal causes (e.g., managerial ability or effort). Further, the effects of causal attributions are greater for managers of high-performing divisions than for managers of low-performing divisions. The study's findings are important because loss aversion and causal attributions are often manifested in firms. Thus, they may bias managers' decisions, which in turn may be detrimental to the firms' long-term value. [source]


New Directions for IPE: Drawing From Behavioral Economics

INTERNATIONAL STUDIES REVIEW, Issue 2 2008
Deborah Kay Elms
Many of the research approaches currently under investigation by behavioral economists are even better suited for international political economy research. The three research ideas illustrated in this article,framing and loss aversion, myopic time horizons, and fairness,highlight concepts of considerable utility for IPE researchers. This article uses previously published International Organization articles, reformulated to consider the same puzzles from a different angle, to illustrate the application of these concepts. This allows readers the opportunity to consider an extended comparison of theoretical explanations of the same empirical evidence. Incorporating more of the knowledge drawn from psychology and current economics will yield superior explanations for political economy research questions that are more accurate, generalizable, parsimonious, and testable. [source]


How beliefs influence the relative magnitude of pleasure and pain

JOURNAL OF BEHAVIORAL DECISION MAKING, Issue 4 2010
Barbara A. Mellers
Abstract Loss aversion is an economic assumption about utility,people value giving up a good more than they value getting it. It also has hedonic meaning,the pain of a loss is greater in magnitude than the pleasure of a comparable gain. But value and pleasure are not necessarily identical. We test the hedonic interpretation of loss aversion in experimental markets. With hedonic forecasts, sellers imagine the pain of losing their endowment, and buyers imagine the pleasure of being endowed. With hedonic experiences, sellers rate the pleasure of having the endowment, and buyers rate the pain of being without it. Contrary to loss aversion, predicted pleasure is greater in magnitude than predicted pain, and experienced pleasure surpasses experienced pain. We show that the relative magnitude of pleasure and pain depends on beliefs about the likelihood of outcomes, as well as utilities. Surprise makes gains more pleasurable and losses more painful. With surprising gains and expected losses, pleasure can surpass pain. But when gains and losses are equally likely (or losses are surprising and gains are expected), the opposite pattern can occur. Finally, within-group and between-group prices are significantly correlated with hedonic experiences. Sellers who feel better with their endowments assign higher selling prices, and buyers who feel worse about the absence of endowment assign higher buying prices. Despite the fact that hedonic experiences deviate from loss aversion, these emotions predict the endowment effect. Copyright © 2009 John Wiley & Sons, Ltd. [source]


Small feedback-based decisions and their limited correspondence to description-based decisions

JOURNAL OF BEHAVIORAL DECISION MAKING, Issue 3 2003
Greg Barron
Abstract The present paper explores situations in which the information available to decision makers is limited to feedback concerning the outcomes of their previous decisions. The results reveal that experience in these situations can lead to deviations from maximization in the opposite direction of the deviations observed when the decisions are made based on a description of the choice problem. Experience was found to lead to a reversed common ratio/certainty effect, more risk seeking in the gain than in the loss domain, and to an underweighting of small probabilities. Only one of the examined properties of description-based decisions, loss aversion, seems to emerge robustly in these ,feedback-based' decisions. These results are summarized with a simple model that illustrates that all the unique properties of feedback-based decisions can be a product of a tendency to rely on recent outcomes. Copyright © 2003 John Wiley & Sons, Ltd. [source]


Relativity, Rank and the Utility of Income,

THE ECONOMIC JOURNAL, Issue 528 2008
Matthew D. Rablen
Relative utility has become an important concept in several disjoint areas of economics. I present a cardinal model of income utility based on the supposition that agents care about their rank in the income distribution and that utility is subject to adaptation over time. Utility levels correspond to the Leyden Individual Welfare Function while utility differences yield a version of the prospect theory value function, thereby providing a new and shared derivation of each. I offer an explanation of some long-standing paradoxes in the wellbeing literature and an insight into the links between relative comparisons and loss aversion. [source]


Evaluation Periods and Asset Prices in a Market Experiment

THE JOURNAL OF FINANCE, Issue 2 2003
Uri Gneezy
We test whether the frequency of feedback information about the performance of an investment portfolio and the flexibility with which the investor can change the portfolio influence her risk attitude in markets. In line with the prediction of myopic loss aversion (Benartzi and Thaler (1995)), we find that more information and more flexibility result in less risk taking. Market prices of risky assets are significantly higher if feedback frequency and decision flexibility are reduced. This result supports the findings from individual decision making, and shows that market interactions do not eliminate such behavior or its consequences for prices. [source]


Optimal price promotion in the presence of asymmetric reference-price effects

MANAGERIAL AND DECISION ECONOMICS, Issue 6 2007
Gadi Fibich
In this study we demonstrate how a reference price may affect the degree of price rigidity/flexibility. For this, we construct a model of reference-price formation, which we use to analyze the effect of asymmetric reference price (cut ,effects') on the profitability of price promotions. We derive explicit expressions for the additional profits earned during a promotional period due to consumer perception of a ,gain', and for the post-promotion loss of potential profits due to consumer perception of a ,loss'. We show that when effects of losses on demand are greater than effects of gains (,loss aversion'), price promotions always lead to a decline in profits. When, however, effects of gains are larger than those of losses, price promotions, as well as reverse price promotions (i.e. price increase) can be profitable. In the latter case we calculate the optimal depth and duration of a price promotion. We also show that reference price can affect price rigidity and flexibility. Copyright © 2007 John Wiley & Sons, Ltd. [source]