scholarly journals Loss aversion does disappear and reverse, although estimates of lambda (λ) are not reliable: Reply to André and De Langhe

2020 ◽  
Author(s):  
Lukasz Walasek ◽  
Timothy L Mullett ◽  
Neil Stewart
Keyword(s):  
Prospect Theory ◽  
Measurement Invariance ◽  
Loss Aversion ◽  
Choice Data ◽  
General Issue ◽  
Choice Proportion ◽  
Choice Sets ◽  
The Common ◽  
Gains And Losses

Walasek and Stewart (2015) demonstrated that loss aversion estimated from fitting accept-reject choice data from a set of 50/50 gambles can be made to disappear or even reverse by manipulating the range of gains and losses experienced in different conditions. André and de Langhe (2020) critique this conclusion because in estimating loss aversion on different choice sets, Walasek and Stewart (2015) have violated measurement invariance. They show, and we agree, that when loss aversion is estimated on the choices common to all conditions there is no difference in prospect theory’s λ parameter. But there are two problems here. First, while there are no differences in λs across conditions, there are very large differences in the proportion of the common gambles that are accepted, which André and de Langhe chose not to report. These choice proportion differences are consistent with decision by sampling (but are inconsistent with prospect theory or any of the alternative mechanisms proposed by André and de Langhe, 2020). Second, we demonstrate a much more general issue related to the issue of measurement invariance: that λ estimated from the accept-reject choices is extremely unreliable and does not generalise even across random splits within large, balanced choice sets. It is therefore not possible to determine whether differences in choice proportions are due to loss aversion or to a bias in accepting or rejecting mixed gambles. We conclude that context has large effects on the acceptance of mixed gambles and that it is futile to estimate λ from accept-reject choices.

scholarly journals No Evidence of Loss Aversion Disappearance and Reversal in Walasek and Stewart (2015)

2021 ◽  
Author(s):  
Quentin André ◽  
Bart de Langhe
Keyword(s):  
Behavioral Economics ◽  
Measurement Invariance ◽  
Loss Aversion ◽  
Experimental Psychology ◽  
Sampling Theory ◽  
Utility Functions ◽  
Experimental Designs ◽  
Experimental Paradigm ◽  
P Loss ◽  
Gains And Losses

Loss aversion—the idea that losses loom larger than equivalent gains—is one of the most important ideas in Behavioral Economics. In an influential article published in the Journal of Experimental Psychology: General, Walasek and Stewart (2015) test an implication of decision by sampling theory: Loss aversion can disappear, and even reverse, depending on the distribution of gains and losses people have encountered. In this manuscript, we show that the pattern of results reported in Walasek and Stewart (2015) should not be taken as evidence that loss aversion can disappear and reverse, or that decision by sampling is the origin of loss aversion. It emerges because the estimates of loss aversion are computed on different lotteries in different conditions. In other words, the experimental paradigm violates measurement invariance, and is thus invalid. We show that analyzing only the subset of lotteries that are common across conditions eliminates the pattern of results. We note that other recently published articles use similar experimental designs, and we discuss general implications for empirical examinations of utility functions.

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

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.

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.

scholarly journals Dynamic prospect theory - two core economic decision theories coexist in the gambling behavior of monkeys

2021 ◽  
Author(s):  
Agnieszka Tymula ◽  
Yuri Imaizumi ◽  
Takashi Kawai ◽  
Jun Kunimatsu ◽  
Masayuki Matsumoto ◽  
...  
Keyword(s):  
Reinforcement Learning ◽  
Prospect Theory ◽  
Weighting Function ◽  
Gambling Behavior ◽  
Theory Model ◽  
Probability Weighting ◽  
Choice Data ◽  
Mathematical Functions ◽  
Weighting Functions ◽  
Dynamic Function

Research in behavioral economics and reinforcement learning has given rise to two influential theories describing human economic choice under uncertainty. The first, prospect theory, assumes that decision-makers use static mathematical functions, utility and probability weighting, to calculate the values of alternatives. The second, reinforcement learning theory, posits that dynamic mathematical functions update the values of alternatives based on experience through reward prediction error (RPE). To date, these theories have been examined in isolation without reference to one another. Therefore, it remains unclear whether RPE affects a decision-maker's utility and/or probability weighting functions, or whether these functions are indeed static as in prospect theory. Here, we propose a dynamic prospect theory model that combines prospect theory and RPE, and test this combined model using choice data on gambling behavior of captive macaques. We found that under standard prospect theory, monkeys, like humans, had a concave utility function. Unlike humans, monkeys exhibited a concave, rather than inverse-S shaped, probability weighting function. Our dynamic prospect theory model revealed that probability distortions, not the utility of rewards, solely and systematically varied with RPE: after a positive RPE, the estimated probability weighting functions became more concave, suggesting more optimistic belief about receiving rewards and over-weighted subjective probabilities at all probability levels. Thus, the probability perceptions in laboratory monkeys are not static even after extensive training, and are governed by a dynamic function well captured by the algorithmic feature of reinforcement learning. This novel evidence supports combining these two major theories to capture choice behavior under uncertainty.

Video conferencing software selection based on hybrid MCDM and cumulative prospect theory under a major epidemic

2021 ◽  
pp. 1-18
Author(s):  
Jie Xu ◽  
Jian Lv ◽  
Hong-Tai Yang ◽  
Yan-Lai Li
Keyword(s):  
Prospect Theory ◽  
Weighting Function ◽  
Video Conferencing ◽  
Cumulative Prospect Theory ◽  
Reference Points ◽  
Software Selection ◽  
Interval Numbers ◽  
The Matrix ◽  
Selection Decision ◽  
Gains And Losses

The video conferencing software is regarded as a significant tool for social distancing and getting incorporations up and going. Due to the indeterminacy of epidemic evolution and the multiple criteria, this paper proposes a video conferencing software selection method based on hybrid multi-criteria decision making (HMCDM) under risk and cumulative prospect theory (CPT), in which the criteria values are expressed in various mathematical forms (e.g., real numbers, interval numbers, and linguistic terms) and can be changed with natural states of the epidemic. Initially, the detailed description of video conferencing software selection problem under an epidemic are given. Subsequently, a whole procedure for video conferencing software selection is conducted, the approaches for processing and normalizing the multi-format evaluation values are presented. Furthermore, the expectations provided by DMs under different natural states of the epidemic are considered as the corresponding reference points (RP). Based on this, the matrix of gains and losses is constructed. Then, the prospect values of all criteria and the perceived probabilities of natural states are calculated according to the value function and the weighting function in CPT respectively. Finally, the proposed method is illustrated by an empirical case study, and the comparison analysis and the sensitivity analysis for the loss aversion parameter are conducted to prove the effectiveness and robustness. The results show that considering the psychological characteristics of DMs in selection decision is beneficial to avoid the unacceptable and potential loss risks. This study could provide a useful guideline for managers who intend to select appropriate video conferencing software.

Scale Development and Factor Analysis

2018 ◽  
pp. 159-183
Author(s):  
Lihua Xu
Keyword(s):  
Scale Development ◽  
Stereotype Threat ◽  
Measurement Invariance ◽  
Leadership Style ◽  
Analytical Methods ◽  
The United States ◽  
Invariance Testing ◽  
Testing Procedures ◽  
Confirmatory Factor ◽  
The Common

Scale development is an important step in empirical research. This chapter describes the common procedures to follow in scale development with essential factor analytical methods. The concept of measurement invariance, the importance of its testing prior to group comparisons, and testing procedures are discussed. Single-group, multi-group, and hierarchical confirmatory factor analytical methods and associated decision making are described. Procedural steps in scale development and measurement invariance testing are illustrated at length using a real dataset in stereotype threat and principals' leadership style in the United States.

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.

scholarly journals Toward an Understanding of the Welfare Effects of Nudges: Evidence from a Field Experiment in the Workplace

2020 ◽  
Vol 130 (632) ◽  
pp. 2329-2353
Author(s):  
Erwin Bulte ◽  
John A List ◽  
Daan van Soest
Keyword(s):  
Field Experiment ◽  
Loss Aversion ◽  
Welfare Effects ◽  
Social Scientists ◽  
Welfare Costs ◽  
Gains And Losses ◽  
Commitment Device

Abstract Social scientists have recently explored how framing of gains and losses affects productivity. We conducted a field experiment in peri-urban Uganda, and compared output levels across 1,000 workers over isomorphic tasks and incentives, framed as either losses or gains. We find that loss aversion can be leveraged to increase the productivity of labour. The estimated welfare costs of using the loss contract are quite modest—perhaps because the loss contract is viewed as a (soft) commitment device.

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.

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