Do People Care About Loss Probabilities?
45 Pages Posted: 3 Nov 2012 Last revised: 20 Oct 2016
Date Written: October 19, 2016
In a series of experiments we demonstrate that people pay explicit attention to the probability of losing. Participants’ willingness to take risks and choice behavior is considerably influenced by loss probabilities, and performance feedback seems unable to mitigate this effect. This behavior contradicts predictions of normative and descriptive decision theories such as Expected Utility Theory and (Cumulative) Prospect Theory for typically assumed preference parameters and functional forms. Our results hold for investment, allocation and choice tasks, for repeated decisions and one-shot ones as well as for decision from experience and decisions based on description.
Keywords: loss aversion, probability of losing, Prospect Theory, repeated investing, aspiration level, investment decisions
JEL Classification: D81, G11
Suggested Citation: Suggested Citation