Conflict and Loss Aversion in Multiattribute Choice: The Effects of Trade-Off Size and Reference Dependence on Decision Difficulty

This chapter begins with a brief overview of the standard economic analysis of litigation and settlement. It then analyzes a series of behavioral impediments to settlement. These include self-serving biases, overoptimism, non-pecuniary motivations, biases stemming from the adversarial nature of litigation, reference-dependence in assessing settlement offers, and the framing of litigation outcomes. The chapter then points to two behavioral phenomena—regret avoidance and loss aversion—that strongly encourage settlements. The chapter looks at behavioral explanations for the relatively limited use of alternative dispute resolution mechanisms. It also takes a closer look at the role of lawyers and client-lawyer relationships. Finally, it highlights the behavioral contribution to the understanding of plea bargaining in criminal proceedings.

Download Full-text

Modeling Loss Aversion and Reference Dependence Effects on Brand Choice

Marketing Science ◽

10.1287/mksc.12.4.378 ◽

1993 ◽

Vol 12 (4) ◽

pp. 378-394 ◽

Cited By ~ 492

Author(s):

Bruce G. S. Hardie ◽

Eric J. Johnson ◽

Peter S. Fader

Keyword(s):

Loss Aversion ◽

Brand Choice ◽

Reference Dependence

Download Full-text

Trade Policy and Loss Aversion

The American Economic Review ◽

10.1257/aer.98.4.1675 ◽

2008 ◽

Vol 98 (4) ◽

pp. 1675-1691 ◽

Cited By ~ 56

Author(s):

Caroline Freund ◽

Çağlar Özden

Keyword(s):

Trade Policy ◽

Loss Aversion ◽

Steel Industry ◽

Policy Implications ◽

Reference Dependence ◽

Domestic Price ◽

Economy Model ◽

World Price ◽

The Us ◽

The World

We develop a political economy model where loss aversion and reference dependence are important in shaping people's preferences over trade policy. The policy implications of the augmented model differ in three ways: there is a region of compensating protection, where a decline in the world price leads to an offsetting increase in protection, such that a constant domestic price is maintained; protection following a single negative price shock will be persistent; and irrespective of the extent of lobbying, there will be a deviation from free trade that favors loss-making industries. The augmented model explains protections of the US steel industry since 1980. (JEL F13, F14, L61)

Download Full-text

Reference dependence, loss aversion and residential property development decisions

Journal of Housing and the Built Environment ◽

10.1007/s10901-020-09803-y ◽

2021 ◽

Cited By ~ 1

Author(s):

Helen X. H. Bao ◽

Charlotte Chunming Meng ◽

Jing Wu

Keyword(s):

Loss Aversion ◽

House Prices ◽

Housing Prices ◽

High Price ◽

Land Market ◽

Reference Dependence ◽

Property Development ◽

Development Data ◽

Integral Role ◽

Land Transaction

AbstractWe analyse land transaction and residential development data from Beijing, China and identify that developers’ evaluation of land transaction exhibits reference dependence and loss aversion. Developers with prior land transaction losses set higher house prices than those without prior losses. This effect is strongest at the beginning and towards the end of the property sales period. It is moderated by developers’ ownership structure and listing status. Privately-owned firms experience stronger effects than their state-owned counterparts, whereas unlisted firms are more strongly affected than their listed counterparts. Results have implications on the relationship between the land and the housing markets in China. In a booming land market where land acquisition entails a high price, developers will transfer excess land price to house prices, thereby increasing the latter. The land market plays an integral role in managing housing prices in China.

Download Full-text

You cannot accurately estimate an individual’s loss aversion using an accept-reject task

10.31234/osf.io/m3c4v ◽

2020 ◽

Author(s):

Lukasz Walasek ◽

Neil Stewart

Keyword(s):

Prospect Theory ◽

Loss Aversion ◽

Model Parameters ◽

Probability Weighting ◽

Value Functions ◽

Trade Off ◽

Simple Version ◽

The Poor ◽

Gain Loss ◽

Linear Probability

Prospect theory's loss aversion is often measured in the accept-reject task, in which participants accept or reject the chance of playing a series of gambles. The gambles are two-branch 50/50 gambles with varying gain and loss amounts (e.g., 50% chance of winning $20 and a 50% chance of losing $10). Prospect theory quantifies loss aversion by scaling losses up by a parameter λ. Here we show that λ suffers from extremely poor parameter recoverability in the accept-reject task. λ cannot be reliably estimated even for a simple version of prospect theory with linear probability weighting and value functions. λ cannot be reliably estimated even in impractically large experiments with participants subject to thousands of choices. The poor recoverability is driven by a trade-off between λ and the other model parameters. However, a measure derived from these parameters is extremely well recovered—and corresponds to estimating the area of gain-loss space in which people accept gambles. This area is equivalent to the number of gambles accepted in a given choice set. That is, simply counting accept decisions is extremely reliably recovered—but using prospect theory to make further use of exactly which gambles were accepted and which were rejected does not work.

Download Full-text