Abstract
The literature in psychology and behavioral economics offers abundant instances of anomalies to the rational choice paradigm. One of the most prominent works attempting to reconcile these is Kahneman and Tversky’s Prospect Theory. Its well-known S-shaped value function accounts for some of the anomalies such as reference dependence, loss aversion, and diminishing sensitivity. Although Prospect Theory describes the manner in which individuals are loss averse, it does not explain why people show loss aversion. This dissertation investigates the factors that affect the cognitive processes behind loss aversion. We find an anomaly in the S-shaped value function. Specifically, the studies demonstrate that the degree of involvement affects the slope of the value curve both for atemporal and intertemporal choices. In addition, we also test the relationship between loss aversion and involvement with varying vividness of outcomes (i.e., when outcomes are related to more versus less vivid stimuli). Testing the vividness effects further extends and confirms our proposed relationship between involvement and loss aversion.
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