Individual-level loss aversion in riskless and risky choices

AbstractLoss aversion can occur in riskless and risky choices. We present novel evidence on both in a non-student sample (660 randomly selected customers of a car manufacturer). We measure loss aversion in riskless choice in endowment effect experiments within and between subjects and find similar levels of average loss aversion in both. The subjects of the within study also participate in a simple lottery choice task which arguably measures loss aversion in risky choices. We find substantial heterogeneity in both measures of loss aversion. Loss aversion in riskless choice and loss aversion in risky choice are strongly positively correlated, but on average riskless loss aversion is higher than risky loss aversion. We find that in both choice tasks, loss aversion increases in age, income, and wealth, and decreases in education. Our results provide novel supportive input to the debate about the reality of loss aversion.

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INFLUENCE OF THE PROBABILTY LEVEL ON THE FRAMING EFFECT IN REFERENCE POINT OF LOSS

Primenjena psihologija ◽

10.19090/pp.2016.1.83-100 ◽

2016 ◽

Vol 9 (1) ◽

pp. 83 ◽

Cited By ~ 2

Author(s):

Vasilije Gvozdenović ◽

Kaja Damnjanović

Keyword(s):

Loss Aversion ◽

Reference Point ◽

Framing Effect ◽

Risky Choice ◽

Preference Reversal ◽

Risk Seeking ◽

Choice Tasks ◽

Experimental Reference ◽

Loss Level ◽

Level Of Risk

Framing effect, which refers to preference reversal due to different descriptions of the same outcome, is examined through risky choice tasks, in which experimental reference point is typically positioned in win-area (situation of lottery). The aim of the conducted study was to examine a framing effect pattern as a function of the level of risk in risky options when experimental reference point is positioned in loss-area (paying a bill). Results show general loss aversion in monetary domain, which is in an accordance with previous studies. Frame influences decisions in the situations when possibility of total loss (level of risk) is perceived as relatively low. Interpretation of these results leads to the conclusion that the probability and reference point determine framing effect. In win-area, frame influences decisions on the highest levels of probability, and, vice-versa, in loss-area, frame influences decisions on the lowest levels of probability. Results confirm notion that risk-aversion is dependent upon a decision-maker’s perception of spending (an investment or a loss). Although observed risk-seeking decisions in negative frame and different decision patterns in loss and win areas can be explained by the model of cumulative prospect-theory, influence of different experimental reference point can not.

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Psychological Mechanisms of Loss Aversion: A Drift-Diffusion Decomposition

10.31234/osf.io/eg8br ◽

2018 ◽

Cited By ~ 2

Author(s):

Wenjia Joyce Zhao ◽

Lukasz Walasek ◽

Sudeep Bhatia

Keyword(s):

Loss Aversion ◽

Risky Choice ◽

Decision Makers ◽

Large Contribution ◽

Drift Diffusion Model ◽

Drift Diffusion ◽

Psychological Mechanisms ◽

Time Patterns ◽

Valuation Process ◽

Choice Tasks

Decision makers often reject mixed gambles offering equal probabilities of a larger gain and a smaller loss. This important phenomenon, referred to as loss aversion, is typically explained by prospect theory, which proposes that decision makers give losses higher utility weights than gains. In this paper we consider alternative psychological mechanisms capable of explaining loss aversion, such as a fixed utility bias favoring rejection, as well as a bias favoring rejection prior to gamble valuation. We use a drift diffusion model of decision making to conceptually distinguish, formally define, and empirically measure these mechanisms. In two preregistered experiments, we show that the pre-valuation bias provides a very large contribution to model fits, predicts key response time patterns, reflects prior expectations regarding gamble desirability, and can be manipulated independently of the valuation process. Our results indicate that loss aversion is the result of multiple different psychological mechanisms, and that the pre-valuation bias is a fundamental determinant of this well-known behavioral tendency. These results have important implications for how we model behavior in risky choice tasks, and how we interpret its relationship with various psychological, clinical, and neurobiological variables.

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Motivating Risky Choices Increases Risk Taking

10.21203/rs.3.rs-145749/v1 ◽

2021 ◽

Author(s):

Ennio Bilancini ◽

Leonardo Boncinelli ◽

Lorenzo Spadoni

Keyword(s):

Treatment Group ◽

Probability Distribution ◽

Risk Taking ◽

Risky Choice ◽

Choice Task ◽

Control Group ◽

Online Experiment ◽

Risky Choices ◽

Experimental Findings ◽

The Impact

Abstract We study the impact of the mode of cognition on risk taking. In an online experiment we ask participants to make a simple decision involving risk. In the control group no manipulation is made, while in the treatment group we exogenously manipulate the mode of cognition by requiring subjects to write down a text that motivates their risky choice before any action is actually taken. Such motivation treatment is meant to induce more reflection upon the action to be taken. Our results show an effect of the motivation treatment on risk taking, suggesting that higher reflection makes subjects more prone to risk taking. The effect is stronger if we consider only subjects who imperfectly understand the probability distribution implied by the simple choice task. Based on our experimental findings, we suggest that reflection and comprehension might be substitutes when individuals make decisions involving risk.

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Individual-Level Loss Aversion in Riskless and Risky Choices

SSRN Electronic Journal ◽

10.2139/ssrn.1010597 ◽

2007 ◽

Cited By ~ 1

Author(s):

Simon Gachter ◽

Eric J. Johnson ◽

Andreas Herrmann

Keyword(s):

Loss Aversion ◽

Individual Level ◽

Risky Choices

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The Endowment Effect: Loss Aversion or a Buy-Sell Discrepancy?

SSRN Electronic Journal ◽

10.2139/ssrn.3588012 ◽

2020 ◽

Author(s):

Gal Smitizsky ◽

Wendy Liu ◽

Uri Gneezy

Keyword(s):

Loss Aversion ◽

Endowment Effect

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Shifting uncertainty intolerance: methylphenidate and attention-deficit hyperactivity disorder

Translational Psychiatry ◽

10.1038/s41398-020-01118-4 ◽

2021 ◽

Vol 11 (1) ◽

Author(s):

Alekhya Mandali ◽

Arjun Sethi ◽

Mara Cercignani ◽

Neil A. Harrison ◽

Valerie Voon

Keyword(s):

Decision Making ◽

Attention Deficit Hyperactivity Disorder ◽

Attention Deficit ◽

Computational Models ◽

Risky Choice ◽

Risk Tolerance ◽

Healthy Population ◽

Hyperactivity Disorder ◽

Risky Choices ◽

Cardinal Symptom

AbstractRisk evaluation is a critical component of decision making. Risk tolerance is relevant in both daily decisions and pathological disorders such as attention-deficit hyperactivity disorder (ADHD), where impulsivity is a cardinal symptom. Methylphenidate, a commonly prescribed drug in ADHD, improves attention but has mixed reports on risk-based decision making. Using a double-blinded placebo protocol, we studied the risk attitudes of ADHD patients and age-matched healthy volunteers while performing the 2-step sequential learning task and examined the effect of methylphenidate on their choices. We then applied a novel computational analysis using the hierarchical drift–diffusion model to extract parameters such as threshold (‘a’—amount of evidence accumulated before making a decision), drift rate (‘v’—information processing speed) and response bias (‘z’ apriori bias towards a specific choice) focusing specifically on risky choice preference. Critically, we show that ADHD patients on placebo have an apriori bias towards risky choices compared to controls. Furthermore, methylphenidate enhanced preference towards risky choices (higher apriori bias) in both groups but had a significantly greater effect in the patient population independent of clinical scores. Thus, methylphenidate appears to shift tolerance towards risky uncertain choices possibly mediated by prefrontal dopaminergic and noradrenergic modulation. We emphasise the utility of computational models in detecting underlying processes. Our findings have implications for subtle yet differential effects of methylphenidate on ADHD compared to healthy population.

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Relative risk aversion models: How plausible are their assumptions?

Rationality and Society ◽

10.1177/1043463121994087 ◽

2021 ◽

pp. 104346312199408

Author(s):

Carlo Barone ◽

Katherin Barg ◽

Mathieu Ichou

Keyword(s):

Relative Risk ◽

Risk Aversion ◽

Loss Aversion ◽

Educational Inequality ◽

Risky Choice ◽

Relative Risk Aversion ◽

Downward Mobility ◽

Educational Decisions ◽

Empirically Supported ◽

Occupational Risks

This work examines the validity of the two main assumptions of relative risk-aversion models of educational inequality. We compare the Breen-Goldthorpe (BG) and the Breen-Yaish (BY) models in terms of their assumptions about status maintenance motives and beliefs about the occupational risks associated with educational decisions. Concerning the first assumption, our contribution is threefold. First, we criticise the assumption of the BG model that families aim only at avoiding downward mobility and are insensitive to the prospects of upward mobility. We argue that the loss-aversion assumption proposed by BY is a more realistic formulation of status-maintenance motives. Second, we propose and implement a novel empirical approach to assess the validity of the loss-aversion assumption. Third, we present empirical results based on a sample of families of lower secondary school leavers indicating that families are sensitive to the prospects of both upward and downward mobility, and that the loss-aversion hypothesis of BY is empirically supported. As regards the risky choice assumption, we argue that families may not believe that more ambitious educational options entail occupational risks relative to less ambitious ones. We present empirical evidence indicating that, in France, the academic path is not perceived as a risky option. We conclude that, if the restrictive assumptions of the BG model are removed, relative-risk aversion needs not drive educational inequalities.

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Prospect Theory Reflects Selective Allocation of Attention

10.31234/osf.io/gkhwz ◽

2017 ◽

Cited By ~ 1

Author(s):

Thorsten Pachur ◽

Michael Schulte-Mecklenbeck

Keyword(s):

Information Processing ◽

Individual Differences ◽

Loss Aversion ◽

Weighting Function ◽

Risky Choice ◽

Process Models ◽

Attention Allocation ◽

Psychological Constructs ◽

Probability Information ◽

As If

There is a disconnect in the literature between analyses of risky choice based on cumulativeprospect theory (CPT) and work on predecisional information processing. One likely reason is that for expectation models (e.g., CPT) it is often assumed that people only behaved as if they conducted the computations leading to the predicted choice, and that the models are thus mute with regard to information processing. We suggest that key psychological constructs in CPT, such as loss aversion and outcome and probability sensitivity, can be interpreted in terms of attention allocation. In two experiments, we tested hypotheses about specific links between CPT parameters and attentional regularities. Experiment 1 used process tracing to monitor participants’ predecisional attention allocation to outcome and probability information. As hypothesized, individual differences in CPT’s loss-aversion, outcome-sensitivity, and probability-sensitivity parameters (estimated from participants’ choices) were systematically associated with individual differences in attention allocation to outcome and probability information. For instance, loss aversion was associated with the relative attention allocated to loss and gain outcomes, and a more strongly curved weighting function was associated with less attention allocated to probabilities. Experiment 2 manipulated participants’ attention to losses or gains, causing systematic differences in CPT’s loss aversion parameter. This result indicates that attention allocation can to some extent cause choice regularities that are captured by CPT. Our findings demonstrate an “as-if” model’s capacity to reflect characteristics of information processing. We suggest that the observed CPT–attention links can be harnessed to inform the development of process models of risky choice.

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The Nature of Risk Preferences: Evidence from Insurance Choices

The American Economic Review ◽

10.1257/aer.103.6.2499 ◽

2013 ◽

Vol 103 (6) ◽

pp. 2499-2529 ◽

Cited By ~ 126

Author(s):

Levon Barseghyan ◽

Francesca Molinari ◽

Ted O'Donoghue ◽

Joshua C Teitelbaum

Keyword(s):

Loss Aversion ◽

Structural Model ◽

Marginal Utility ◽

Unobserved Heterogeneity ◽

Risky Choice ◽

Probability Weighting ◽

Disappointment Aversion ◽

Diminishing Marginal Utility ◽

Standard Risk ◽

Small Probabilities

We use data on insurance deductible choices to estimate a structural model of risky choice that incorporates “standard” risk aversion (diminishing marginal utility for wealth) and probability distortions. We find that probability distortions—characterized by substantial overweighting of small probabilities and only mild insensitivity to probability changes—play an important role in explaining the aversion to risk manifested in deductible choices. This finding is robust to allowing for observed and unobserved heterogeneity in preferences. We demonstrate that neither Kőszegi-Rabin loss aversion alone nor Gul disappointment aversion alone can explain our estimated probability distortions, signifying a key role for probability weighting. (JEL D14, D81, G22)

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The empirical relationship between nonstandard economic behaviors

Proceedings of the National Academy of Sciences ◽

10.1073/pnas.1821353116 ◽

2019 ◽

Vol 116 (33) ◽

pp. 16262-16267 ◽

Cited By ~ 4

Author(s):

Mark Dean ◽

Pietro Ortoleva

Keyword(s):

Loss Aversion ◽

Time Preference ◽

Ambiguity Aversion ◽

Empirical Relationship ◽

Endowment Effect ◽

Behavioral Characteristics ◽

Strong Correlations ◽

Behavioral Economic ◽

Economic Choice ◽

And Gender

We study the joint distribution of 11 behavioral phenomena in a group of 190 laboratory subjects and compare it to the predictions of existing models as a step in the development of a parsimonious, general model of economic choice. We find strong correlations between most measures of risk and time preference, between compound lottery and ambiguity aversion, and between loss aversion and the endowment effect. Our results support some, but not all attempts to unify behavioral economic phenomena. Overconfidence and gender are also predictive of some behavioral characteristics.

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