Do People Care About Loss Probabilities?

Journal of Risk and Uncertainty (forthcoming)

32 Pages Posted: 3 Nov 2012 Last revised: 8 Jan 2022

See all articles by Stefan Zeisberger

Stefan Zeisberger

Radboud University, Institute for Management Research; University of Zurich, Department of Banking and Finance

Date Written: August 23, 2021

Abstract

In a series of experiments, we provide evidence that people pay special attention to the probability of losing. We first analyze this behavior in the typically used one-shot choice tasks. We then extend our analysis to repeated decisions in choice tasks, as well as allocation and investment tasks. Additionally, we test both decision making under risk and under gradually removed uncertainty, as with decisions from experience. Our findings of explicit attention to loss probabilities contradict the predictions of normative and descriptive decision theories, such as Expected Utility Theory and (Cumulative) Prospect Theory. We suggest a value function with a jump rather than a kink at the reference point, which separates gains and losses.

Keywords: loss aversion, probability of losing, Prospect Theory, repeated investing, aspiration level, investment decisions

JEL Classification: D81, G11

Suggested Citation

Zeisberger, Stefan, Do People Care About Loss Probabilities? (August 23, 2021). Journal of Risk and Uncertainty (forthcoming), Available at SSRN: https://ssrn.com/abstract=2169394 or http://dx.doi.org/10.2139/ssrn.2169394

Stefan Zeisberger (Contact Author)

Radboud University, Institute for Management Research ( email )

Nijmegen
Netherlands

University of Zurich, Department of Banking and Finance ( email )

Z├╝rich
Switzerland

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