Abstract

http://ssrn.com/abstract=892336
 
 

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Exploring the Nature of Loss Aversion


Eric J. Johnson


Columbia Business School - Marketing

Simon Gaechter


University of Nottingham; Institute for the Study of Labor (IZA); CESifo (Center for Economic Studies and Ifo Institute)

Andreas Herrmann


University of St. Gallen - MCM Institute

March 2006

IZA Discussion Paper No. 2015

Abstract:     
Loss aversion, the fact that losses have a greater impact than gains, is a fundamental property of behavioral accounts of choice. In this paper, we suggest four possible characterizations of the relative impact of losses and gains: (1) It could be a constant, such as the much cited value of 2, as in losses have twice the impact of gains. (2) It could be a systematic individual difference, with some individuals more or less loss aversion, (3) it could be a property of the attribute, or (4) a property of the different processes used to construct selling and buying prices. We examine the behavior of a large sample of auto buyers using an experiment which allows us to measure loss aversion, at the individual level for several different attributes. A set of hierarchical linear models shows that to understand loss aversion, one must consider the process used to construct prices. Interestingly, we show that knowledge of the attribute lowers loss aversion and that age and attribute importance increases loss aversion.

Number of Pages in PDF File: 47

Keywords: loss aversion, consumer choice, reference-dependent preferences

JEL Classification: C90, M31, D11

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Date posted: March 21, 2006  

Suggested Citation

Johnson, Eric J. and Gaechter, Simon and Herrmann, Andreas, Exploring the Nature of Loss Aversion (March 2006). IZA Discussion Paper No. 2015. Available at SSRN: http://ssrn.com/abstract=892336

Contact Information

Eric J. Johnson
Columbia Business School - Marketing ( email )
New York, NY 10027
United States

Simon Gachter (Contact Author)
University of Nottingham ( email )
University Park
Nottingham, NG8 1BB
United Kingdom
Institute for the Study of Labor (IZA)
P.O. Box 7240
Bonn, D-53072
Germany
CESifo (Center for Economic Studies and Ifo Institute)
Poschinger Str. 5
Munich, DE-81679
Germany
Andreas Herrmann
University of St. Gallen - MCM Institute ( email )
Blumenbergplatz 9
CH-9000 St. Gallen
Switzerland
+41-71-224-3026 (Phone)
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