Loss Aversion and Consumption Choice: Theory and Experimental Evidence

We analyze a consumer-choice model with price uncertainty, loss aversion, and expectation-based reference points. The implications of this model are tested in an experiment in which participants have to make a consumption choice between two sandwiches. Participants differ in their reported taste for the two sandwiches and in their degree of loss aversion, which we measure separately. We find that more-loss-averse participants are more likely to opt for the cheaper sandwich, in line with theoretical predictions. The estimates in the model with rational expectations are slightly more significant than those with naïve expectations. (JEL D11, D12, D84, M31)

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Loss Aversion and Consumption Plans with Stochastic Reference Points

The B E Journal of Theoretical Economics ◽

10.1515/bejte-2014-0100 ◽

2016 ◽

Vol 16 (1) ◽

pp. 303-336 ◽

Cited By ~ 1

Author(s):

Hyeon Park

Keyword(s):

Decision Maker ◽

Loss Aversion ◽

Intertemporal Choice ◽

Choice Model ◽

State Dependence ◽

Analytic Solutions ◽

The State ◽

Reference Points ◽

State Dependent ◽

The Individual

AbstractThis paper studies the making of risky choices following loss aversion with endogenous reference expectations under the two schemes of state-independent and state-dependent stochastic reference points. Using a tractable, intertemporal choice model, this paper derives analytic solutions to show that, when loss aversion is high, the reference-dependent decision maker saves a markedly larger amount than is predicted by the standard model. When the loss aversion is low (i.e. the individual is loss-tolerant), the overall result is ambiguous, although the decision maker may deviate into consuming more; if he faces a small level of uncertainty relative to the intensity of his loss aversion, he may even do this by borrowing. Given the same loss aversion level, this study determines that, in the presence of positive state-dependence, the state-independent model generates greater deviation than the state-dependent one. Finally, this paper derives a two-period general equilibrium result with two agents who have different attitudes toward loss.

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Detection, Identification, and Estimation of Loss Aversion: Evidence from an Auction Experiment

American Economic Journal Microeconomics ◽

10.1257/mic.6.1.91 ◽

2014 ◽

Vol 6 (1) ◽

pp. 91-133 ◽

Cited By ~ 15

Author(s):

A. Banerji ◽

Neha Gupta

Keyword(s):

Willingness To Pay ◽

Experimental Evidence ◽

Loss Aversion ◽

Reference Point ◽

Value Distribution ◽

Reference Points ◽

Experimental Auction ◽

Auction Design ◽

Second Price Auctions

We provide a novel experimental auction design, in which (i) an exogenous decrease in the probability of winning, conditional on the bid, reduces the optimal bid of a loss averse agent whose reference point is expectations based; (ii) observed bid distributions uniquely identify the participants' latent value distribution and loss-aversion parameter. Experimental evidence affirms the presence of such reference points. We show that at the estimated magnitudes of loss aversion, (a) conventional Becker, DeGroot, and Marschak (1964) experiments may lead to large biases in estimated willingness to pay (which our design can correct for); and (b) first-price auctions may fetch moderately higher revenue, compared with second-price auctions. (JEL C91, D44, D82)

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Fungibility and Consumer Choice: Evidence from Commodity Price Shocks*

The Quarterly Journal of Economics ◽

10.1093/qje/qjt018 ◽

2013 ◽

Vol 128 (4) ◽

pp. 1449-1498 ◽

Cited By ~ 79

Author(s):

Justine S. Hastings ◽

Jesse M. Shapiro

Keyword(s):

Loss Aversion ◽

Consumer Choice ◽

Choice Model ◽

Commodity Price ◽

Gasoline Prices ◽

Income Effects ◽

Wide Range ◽

Commodity Price Shocks ◽

Psychological Models ◽

Quality Choice

Abstract We formulate a test of the fungibility of money based on parallel shifts in the prices of different quality grades of a commodity. We embed the test in a discrete-choice model of product quality choice and estimate the model using panel microdata on gasoline purchases. We find that when gasoline prices rise, consumers substitute to lower octane gasoline, to an extent that cannot be explained by income effects. Across a wide range of specifications, we consistently reject the null hypothesis that households treat “gas money” as fungible with other income. We compare the empirical fit of three psychological models of decision making. A simple model of category budgeting fits the data well, with models of loss aversion and salience both capturing important features of the time series.

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Consumer Choice Modeling in Product Line Pricing: Reservation Prices and Discrete Choice Theory

SSRN Electronic Journal ◽

10.2139/ssrn.1979492 ◽

2012 ◽

Author(s):

Stefan Mayer ◽

Jochen Goensch

Keyword(s):

Discrete Choice ◽

Consumer Choice ◽

Choice Theory ◽

Product Line ◽

Choice Modeling ◽

Reservation Prices

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An Empirical Study of Store Choice Model: An Endogenous Construct

Adhyayan A Journal of Management Sciences ◽

10.21567/adhyayan.v4i2.10205 ◽

2014 ◽

Vol 4 (2) ◽

Author(s):

Prof. Amit Shrivastava ◽

Prof. Sushil Kumar Pare ◽

Prof (Dr) Saumya Singh

Keyword(s):

Empirical Research ◽

Consumer Choice ◽

Choice Model ◽

Social Science Research ◽

Product Category ◽

Science Research ◽

Consumer Decision Making ◽

Store Choice ◽

Store Attributes ◽

Patronage Intention

Inadequate is the empirical research on store choice model in view of retail store attributes with endogenous construct of store patronage intention of consumer. Conventional wisdom and social science research-based insights for underpinning the design of store environment established elements such as music, scent, crowding and physical attractiveness of the store. Earlier empirical findings lack on key anterior, which include consumers’ time and effort as well as the psychological costs such as convenient, economical, risk mitigated shopping experience. The premise on which overall effects in our model rests, is that store attributes influence consumers' cognitive process and develop perceptual framework of store choice criteria — namely, convenience, reputation of outlet, branded merchandise (mediated through perceived quality). This research presents a formal test of the linear regression equation model in the context of store choice behaviour, involving one product category. The present paper explores these attributes and their affect on consumer from different socio-economic classes, willingness to purchase and to patronize if these factors are modified. Questioning the earlier conclusions that all attributes aforementioned are equally important in consumer decision making, the current results indicate that consumers place differential significance on each attribute, and the level of significance placed on each attribute varies with different socio economic class. These findings are significantly important to the retail industry as they identify the critical attributes responsible for building consumer choice and patronage among different socio economy classes. This model also paves way for another premise of empirical research, that shoppers might develop category-wise store choice or patronage behaviour model.

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A regret-based route choice model with asymmetric preference in a stochastic network

Advances in Mechanical Engineering ◽

10.1177/1687814018793238 ◽

2018 ◽

Vol 10 (8) ◽

pp. 168781401879323

Author(s):

Lei Zhao ◽

Hongzhi Guan ◽

Xinjie Zhang ◽

Xiongbin Wu

Keyword(s):

Loss Aversion ◽

Equilibrium Model ◽

Choice Model ◽

User Equilibrium ◽

Stochastic User Equilibrium ◽

Regret Minimization ◽

Route Network ◽

Travel Decision ◽

Gains And Losses ◽

Random Regret Minimization

In this study, a stochastic user equilibrium model on the modified random regret minimization is proposed by incorporating the asymmetric preference for gains and losses to describe its effects on the regret degree of travelers. Travelers are considered to be capable of perceiving the gains and losses of attributes separately when comparing between the alternatives. Compared to the stochastic user equilibrium model on the random regret minimization model, the potential difference of emotion experienced induced by the loss and gain in the equal size is jointly caused by the taste parameter and loss aversion of travelers in the proposed model. And travelers always tend to use the routes with the minimum perceived regret in the travel decision processes. In addition, the variational inequality problem of the stochastic user equilibrium model on the modified random regret minimization model is given, and the characteristics of its solution are discussed. A route-based solution algorithm is used to resolve the problem. Numerical results given by a three-route network show that the loss aversion produces a great impact on travelers’ choice decisions and the model can more flexibly capture the choice behavior than the existing models.

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