Do People Care About Loss Probabilities?
Journal of Risk and Uncertainty (forthcoming)
32 Pages Posted: 3 Nov 2012 Last revised: 8 Jan 2022
Date Written: August 23, 2021
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: Suggested Citation