This project investigates loss aversion, which is one of the central concepts in the decision making and behavioral economics literatures. Loss aversion is said to occur when a loss of a given magnitude has more influence on choices than does a gain of the same magnitude (for example, most people will refuse a gamble with equal chances to gain or lose $100). Numerous studies have shown that loss aversion plays a key role in important real-world phenomena, such as the endowment effect, the status quo bias, the equity-premium puzzle in financial economics, the tendency to hold on to 'losing' stocks while selling 'winners', the discrepancy between valuations of public (especially environmental) goods by willingness-to-pay for them or by the compensation demanded to give them up, legal principles of compensation for damage, failures of negotiations, and many others. This project investigates whether a positive-negative asymmetry analogous to loss aversion occurs in the experience of decision outcomes (i.e., is loss aversion a mistake?). Preliminary evidence reported in the project description suggests that experiences of decision outcomes do not always show the good-bad asymmetry that would be expected from loss aversion. If loss aversion turns out to be a mistake, this work would require a major rethinking of the nature of loss aversion, a concept that is currently taught to almost every business student in the United States, and which plays an important role in many other social science curricula, including economics, public policy, law, and psychology. In addition, the possibility that loss aversion in choices could in some cases be a mistake, in the sense that it does not reflect an asymmetry in experience, would require a wide-ranging reanalysis of the many practical decisions where loss aversion has been found to play a significant role.
ABSTRACT
Principal investigator: Schkade, David Institution: University of Texas at Austin Proposal ID : 0213481 Proposal Title: Collaborative Research: Understanding loss aversion
This project investigates loss aversion, which is one of the central concepts in the decision making and behavioral economics literatures. Loss aversion is said to occur when a loss of a given magnitude has more influence on choices than does a gain of the same magnitude (for example, most people will refuse a gamble with equal chances to gain or lose $100). Numerous studies have shown that loss aversion plays a key role in important real-world phenomena, such as the endowment effect, the status quo bias, the equity-premium puzzle in financial economics, the tendency to hold on to 'losing' stocks while selling 'winners', the discrepancy between valuations of public (especially environmental) goods by willingness-to-pay for them or by the compensation demanded to give them up, legal principles of compensation for damage, failures of negotiations, and many others. This project investigates whether a positive-negative asymmetry analogous to loss aversion occurs in the experience of decision outcomes (i.e., is loss aversion a mistake?). Preliminary evidence reported in the project description suggests that experiences of decision outcomes do not always show the good-bad asymmetry that would be expected from loss aversion. If loss aversion turns out to be a mistake, this work would require a major rethinking of the nature of loss aversion, a concept that is currently taught to almost every business student in the United States, and which plays an important role in many other social science curricula, including economics, public policy, law, and psychology. In addition, the possibility that loss aversion in choices could in some cases be a mistake, in the sense that it does not reflect an asymmetry in experience, would require a wide-ranging reanalysis of the many practical decisions where loss aversion has been found to play a significant role.
