Loss Aversion and Gain Appetite in the Small and in the Large

International Mathematical Forum, Vol. 11, 2016, no. 14, 673 - 678

6 Pages Posted: 3 Aug 2016

See all articles by Robert Bordley

Robert Bordley

University of Michigan at Ann Arbor

Luisa Tibiletti

University of Turin - Department of Management

Mariacristina Uberti

University of Turin

Date Written: August 1, 2016

Abstract

In their pioneering works on prospect theory Kahneman and Tversky (1979, 1992) propose the ground-breaking idea that in making decisions under risk individuals evaluate asymmetrically losses and gains against to a personal reference point. According to the Kahneman and Tversky (1979) statement “losses loom larger than gains”, individuals display loss aversion. However, Sacchi and Stanca (2014) argue that people may exhibit gain appetite that states that “gains loom larger than losses”. Although the prospect theory can be traced back of more than thirty years, how to formalize asymmetrical preferences to a reference point is still an open issue (see Abdellaoui et al., 2007; and Ghossoub, 2012). In this short note we set a preference-based definition for loss aversion, gain appetite and equally weighted preferences “in the small”, i.e. for outcomes around a given reference point; and “in the large”, i.e. for any outcome of the domain. The classical Kahneman and Tversky (1979, page 279) loss aversion definition follows as a special case.

Keywords: Loss-gain asymmetry, Preference-based definition of loss aversion and gain appetite; Multiple reference points

JEL Classification: G1, D81

Suggested Citation

Bordley, Robert and Tibiletti, Luisa and Uberti, Mariacristina, Loss Aversion and Gain Appetite in the Small and in the Large (August 1, 2016). International Mathematical Forum, Vol. 11, 2016, no. 14, 673 - 678 . Available at SSRN: https://ssrn.com/abstract=2817045

Robert Bordley

University of Michigan at Ann Arbor ( email )

500 S. State Street
Ann Arbor, MI 48109
United States

Luisa Tibiletti (Contact Author)

University of Turin - Department of Management ( email )

C.so Unione Sovietica, 218 bis
Turin, Turin 10100
Italy
39-11-670-6229 (Phone)
39-11-670-6238 (Fax)

HOME PAGE: http://www.management.unito.it/tibiletti

Mariacristina Uberti

University of Turin ( email )

Via Po 53
Torino, Turin - Piedmont 10100
Italy

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