Exploring the Nature of Loss Aversion

47 Pages Posted: 21 Mar 2006  

Eric J. Johnson

Columbia Business School - Marketing

Simon Gaechter

University of Nottingham; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute)

Andreas Herrmann

University of St. Gallen - MCM Institute

Date Written: March 2006

Abstract

Loss aversion, the fact that losses have a greater impact than gains, is a fundamental property of behavioral accounts of choice. In this paper, we suggest four possible characterizations of the relative impact of losses and gains: (1) It could be a constant, such as the much cited value of 2, as in losses have twice the impact of gains. (2) It could be a systematic individual difference, with some individuals more or less loss aversion, (3) it could be a property of the attribute, or (4) a property of the different processes used to construct selling and buying prices. We examine the behavior of a large sample of auto buyers using an experiment which allows us to measure loss aversion, at the individual level for several different attributes. A set of hierarchical linear models shows that to understand loss aversion, one must consider the process used to construct prices. Interestingly, we show that knowledge of the attribute lowers loss aversion and that age and attribute importance increases loss aversion.

Keywords: loss aversion, consumer choice, reference-dependent preferences

JEL Classification: C90, M31, D11

Suggested Citation

Johnson, Eric J. and Gaechter, Simon and Herrmann, Andreas, Exploring the Nature of Loss Aversion (March 2006). IZA Discussion Paper No. 2015. Available at SSRN: https://ssrn.com/abstract=892336

Eric J. Johnson

Columbia Business School - Marketing ( email )

New York, NY 10027
United States

Simon Gachter (Contact Author)

University of Nottingham ( email )

University Park
Nottingham, NG8 1BB
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Andreas Herrmann

University of St. Gallen - MCM Institute ( email )

Blumenbergplatz 9
CH-9000 St. Gallen
Switzerland
+41-71-224-3026 (Phone)

Paper statistics

Downloads
767
Rank
24,876
Abstract Views
3,211