From Loss Aversion to Loss Acceptance: Context Effects on Loss Aversion in Risky Choice

Abstract:     
This research identifies an important moderator of loss aversion in a risky choice context, and presents evidence that loss aversion in risky choice is context-dependent. Three studies show that people expect a loss to be less painful when the magnitude of the loss is much less than a salient alternative (e.g., people expect losing $10 to be less painful when they consider losing $100 than when they consider losing $1). As a consequence, people are more willing to accept a gamble offering an equal chance to win or lose a fixed amount of money when the context causes them to consider wager amounts that are much larger. This research may help explain why even typically loss averse people may gamble at casinos, and why people are willing to accept sure losses to avoid a very small chance to lose a very large amount.

Keywords: Gambling, Loss Aversion, Risky Choice

Working Paper Series