On the Descriptive Value of Loss Aversion in Decisions under Risk: Six Clarifications
Judgment and Decision Making, 8(3), pp. 214-235, 2013
22 Pages Posted: 6 Sep 2007 Last revised: 11 Jun 2013
Previous studies of loss aversion in decisions under risk have led to mixed results. Losses appear to loom larger than gains in some settings, but not in others. The current paper clarifies these results by highlighting six experimental manipulations that tend to increase the likelihood of the behavior predicted by loss aversion. These manipulations include: (1) framing of the safe alternative as the status quo; (2) ensuring that the choice pattern predicted by loss aversion maximizes the probability of positive (rather than zero or negative) outcomes; (3) the use of high nominal (numerical) payoffs; (4) the use of high stakes; (5) the inclusion of highly attractive risky prospects that creates a contrast effect; and (6) the use of long experiments in which no feedback is provided and in which the computation of the expected values is difficult. In addition, the results suggest the possibility of learning in the absence of feedback: The tendency to select simple strategies, like “maximize the worst outcome” which implies “loss aversion”, increases when this behavior is not costly. Theoretical and practical implications are discussed.
Keywords: Prospect theory, relative risk aversion, status-quo bias, equity premium puzzle, contrast effect, choice lists
JEL Classification: C91, D01
Suggested Citation: Suggested Citation