Individual-Level Loss Aversion in Riskless and Risky Choices

25 Pages Posted: 29 Aug 2007

See all articles by Simon Gaechter

Simon Gaechter

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

Eric J. Johnson

Columbia Business School - Marketing

Andreas Herrmann

University of St. Gallen - MCM Institute

Date Written: July 2007

Abstract

Loss aversion can occur in riskless and risky choices. Yet, there is no evidence whether people who are loss averse in riskless choices are also loss averse in risky choices. We measure individual-level loss aversion in riskless choices in an endowment effect experiment by eliciting both WTA and WTP from each of our 360 subjects (randomly selected customers of a car manufacturer). All subjects also participate in a simple lottery choice task which arguably measures loss aversion in risky choices. We find substantial heterogeneity in both measures of loss aversion. Loss aversion in the riskless choice task and loss aversion in the risky choice task are highly significantly and strongly positively correlated. We find that in both choice tasks loss aversion increases in age, income, and wealth, and decreases in education.

Keywords: loss aversion, endowment effect, field experiments

JEL Classification: C91, C93, D81

Suggested Citation

Gachter, Simon and Johnson, Eric J. and Herrmann, Andreas, Individual-Level Loss Aversion in Riskless and Risky Choices (July 2007). IZA Discussion Paper No. 2961, Available at SSRN: https://ssrn.com/abstract=1010597

Simon Gachter (Contact Author)

University of Nottingham ( email )

University Park
Nottingham, NG8 1BB
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Eric J. Johnson

Columbia Business School - Marketing ( email )

New York, NY 10027
United States

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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