The Boundaries of Loss Aversion

2005 ◽  
Vol 42 (2) ◽  
pp. 119-128 ◽  
Author(s):  
Nathan Novemsky ◽  
Daniel Kahneman
Keyword(s):  
Risk Aversion ◽  
Prospect Theory ◽  
Loss Aversion ◽  
Equal Probability ◽  
Preliminary Support ◽  
Complete Account

In this article, the authors propose some psychological principles to describe the boundaries of loss aversion. A key idea is that exchange goods that are given up “as intended” do not exhibit loss aversion. For example, the authors propose that money given up in purchases is not generally subject to loss aversion. The results of several experiments provide preliminary support for the hypotheses. The authors find that, consistent with prospect theory, loss aversion provides a complete account of risk aversion for risks with equal probability to win or lose. The authors propose boundaries for this result and suggest further tests of the model.

scholarly journals Performance measurement of investment companies with loss aversion in Tehran Stock Exchange

2015 ◽  
Vol 5 (3) ◽  
pp. 81-87 ◽  
Author(s):  
Shahabeddin Shams ◽  
Fatemeh Rezvani
Keyword(s):  
Risk Aversion ◽  
Prospect Theory ◽  
Correlation Coefficient ◽  
Loss Aversion ◽  
Stock Exchange ◽  
Portfolio Performance ◽  
Spearman Correlation ◽  
Risk Seeking ◽  
Investment Companies ◽  
Portfolio Return

This study measures the portfolio performance of listed investment companies in Tehran Stock Exchange (TSE) based on prospect theory. The criterion is measured by the ratio of gain to loss, to reflect risk-aversion in gains and risk-seeking in losses. The sample consists of 15 listed investment companies registered in TSE during 2003-2013. Research variables consist of portfolio return, market return, risk-free return, systematic risk, Treynor and Loss Aversion index. Hypotheses have been tested with Spearman correlation coefficient. The results show that Loss Aversion can be used as a new index for measuring portfolio performance.

scholarly journals Relative risk aversion models: How plausible are their assumptions?

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.

scholarly journals Risk Aversion in Cumulative Prospect Theory

2008 ◽  
Vol 54 (1) ◽  
pp. 208-216 ◽  
Author(s):  
Ulrich Schmidt ◽  
Horst Zank
Keyword(s):  
Risk Aversion ◽  
Prospect Theory ◽  
Cumulative Prospect Theory

scholarly journals Cumulative prospect theory and deferred annuities

2019 ◽  
Vol 11 (3) ◽  
pp. 277-293 ◽  
Author(s):  
Anran Chen ◽  
Steven Haberman ◽  
Stephen Thomas
Keyword(s):  
Prospect Theory ◽  
Loss Aversion ◽  
Design Methodology ◽  
Behavioral Model ◽  
Cumulative Prospect Theory ◽  
Optimal Consumption ◽  
Content Type ◽  
Deferred Annuity ◽  
To Receive

Purpose Although it has been proved theoretically that annuities can provide optimal consumption during one’s retirement period, retirees’ reluctance to purchase annuities is a long-standing puzzle. The purpose of this paper is to use behavioral model to analyze the low demand for immediate annuities. Design/methodology/approach The authors employ cumulative prospect theory (CPT), which contains both loss aversion and probability transformations, to analyze the annuity puzzle. Findings The authors show that CPT can explain the unattractiveness of immediate annuities. It also shows that retirees would be willing to buy a long-term deferred annuity at retirement. By considering each component from CPT in turn, the loss aversion is found to be the major reason that stops people from buying an annuity while the survival rate transformation is an important factor affecting the decision of when to receive annuity incomes. Originality/value This paper identifies CPT as one of the reasons for the low demand of immediate annuities. It further suggests that long-term deferred annuities could overcome behavioral obstacles and become popular among retirees.

Loss Aversion on the Links

2016 ◽  
Vol 5 (4) ◽  
pp. 24-40
Author(s):  
Todd A. McFall
Keyword(s):  
Prospect Theory ◽  
Loss Aversion ◽  
Utility Level ◽  
Relative Standing

Prospect theory predicts that loss averse agents who fear they will not reach their reference utility level are more apt to adopt risky strategies to avoid that painful possibility compared to agents who are more sure of their relative standing. This paper tests this theory with data from professional golf events and finds evidence of economically inefficient loss aversion amongst tournament competitors. While playing par five holes, golfers who have been penalized because of a poor first shot are more likely to adopt an aggressive strategy for finishing the hole compared to their non-penalized rivals who are not feeling the burden of not meeting a preconceived reference score. The risks the penalized golfers take are economically inefficient, as their average performances are worse than their non-penalized rivals' average performances for the balance of the hole.

Prospect Theory and Foreign Policy Analysis

2017 ◽  
Author(s):  
Jeffrey W. Taliaferro
Keyword(s):  
Decision Making ◽  
Foreign Policy ◽  
Policy Analysis ◽  
Prospect Theory ◽  
Loss Aversion ◽  
Reference Point ◽  
Endowment Effect ◽  
Risk Averse ◽  
Foreign Policy Analysis ◽  
Point Selection

Prospect theory is one of the most influential behavioral theories in the international relations (IR) field, particularly among scholars of security studies, political psychology, and foreign policy analysis. Developed by Israeli psychologists Daniel Kahneman and Amos Tversky, prospect theory provides key insights into decision making under conditions of risk and uncertainty. For example, most individuals are risk averse to secure gains, but risk acceptant to avoid losses (loss aversion). In addition, most people value items they already posses more than they value items they want to acquire (endowment effect), and tend to be risk averse if they perceive themselves to be facing gains relative to their reference point (risk propensity). Prospect theory has generated an enormous volume of scholarship in IR, which can be divided into two “generations”. The first generation (1990–1999) sought to establish prospect theory’s plausibility in the “real world” by testing hypotheses derived from it against subjective expected-utility theory or rational choice models of foreign policy decision making. The second generation (2000–present) began to incorporate concepts associated with prospect theory and related experimental literature on group risk taking into existing mid-level theories of IR and foreign policy behavior. Two substantive areas covered by scholars during this period are coercive diplomacy and great power intervention in the periphery as they relate to loss aversion. Both generations of prospect theory literature suffer from conceptual and methodological difficulties, mainly around the issues of reference point selection, framing, and preference reversal outside laboratory settings.

Security issuance and price impact under loss aversion

2017 ◽  
Vol 04 (02n03) ◽  
pp. 1750036 ◽  
Author(s):  
Weining Niu ◽  
Qingduo Zeng
Keyword(s):  
Numerical Simulation ◽  
Risk Aversion ◽  
Capital Structure ◽  
Loss Aversion ◽  
Price Impact ◽  
Positive Relation ◽  
Corporate Financing ◽  
Negative Relation ◽  
Risk Seeking ◽  
Financing Choice

The paper builds an equilibrium model to analyze the effect of risk aversion, risk seeking and loss aversion on corporate financing choice, capital structure and price impact. It shows that if the probability of a gain is higher than a certain level, risk aversion parameter has a positive relation with capital structure and price impact; while risk seeking parameter has a negative relation with capital structure and price impact, and vice versa. Loss aversion has negative relation with capital structure and price impact. The numerical simulation verifies our findings to some extent.

scholarly journals Enhanced Risk Aversion, But Not Loss Aversion, in Unmedicated Pathological Anxiety

2017 ◽  
Vol 81 (12) ◽  
pp. 1014-1022 ◽  
Author(s):  
Caroline J. Charpentier ◽  
Jessica Aylward ◽  
Jonathan P. Roiser ◽  
Oliver J. Robinson
Keyword(s):  
Risk Aversion ◽  
Loss Aversion ◽  
Pathological Anxiety
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