Abstract
Loss aversion can occur in riskless and risky choices. Yet, there is no evidence whether people who are loss averse in riskless choices are also loss averse in risky choices. We measure individual-level loss aversion in riskless choices in an endowment effect experiment by eliciting both WTA and WTP from each of our 360 subjects (randomly selected customers of a car manufacturer). All subjects also participate in a simple lottery choice task which arguably measures loss aversion in risky choices. We find substantial heterogeneity in both measures of loss aversion. Loss aversion in the riskless choice task and loss aversion in the risky choice task are highly significantly and strongly positively correlated. We find that in both choice tasks loss aversion increases in age, income, and wealth, and decreases in education.
Highlights
Loss aversion—the psychological propensity that losses loom larger than equalsized gains relative to a reference point—can occur in riskless and in risky choices, as argued in two seminal papers by Amos Tversky and Daniel Kahneman (Kahneman & Tversky, 1979; Tversky & Kahneman, 1991)
We investigated loss aversion in riskless and risky choices in a large non-student sample
Our results show evidence of loss aversion, both in riskless and risky choices. 82% of people were loss averse in riskless choice; 71% of people displayed loss aversion in risky choice
Summary
Loss aversion—the psychological propensity that losses loom larger than equalsized gains relative to a reference point—can occur in riskless and in risky choices, as argued in two seminal papers by Amos Tversky and Daniel Kahneman (Kahneman & Tversky, 1979; Tversky & Kahneman, 1991). The gap between WTA and WTP has been interpreted as evidence for loss aversion in riskless choice (e.g., Rozin & Royzman, 2001; Tversky & Kahneman, 1991). We do these experiments in two versions: between subjects (Study 1; n = 300) and within subjects (Study 2; n = 360). Result 3 reports estimates of individual-level loss aversion (kriskless) based on an individual’s WTA/WTP ratio. Representative for the population at large, but we can answer how in our sample socio-demographic variables affect loss aversion both in riskless and in risky choices. This paper, and Mrkva et al (2020), provide strong evidence for the empirical relevance of loss aversion, while acknowledging that loss aversion has important moderators
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