The Effect of Wealth Shocks on Loss Aversion: Behavior and Neural Correlates.

V S Chandrasekhar Pammi,Sangkyun Lee,Ranganatha Sitaram,Charles N Noussair,Sergio Ruiz

doi:10.3389/fnins.2017.00237

Abstract

Kahneman and Tversky (1979) first demonstrated that when individuals decide whether or not to accept a gamble, potential losses receive more weight than possible gains in the decision. This phenomenon is referred to as loss aversion. We investigated how loss aversion in risky financial decisions is influenced by sudden changes to wealth, employing both behavioral and neurobiological measures. We implemented an fMRI experimental paradigm, based on that employed by Tom et al. (2007). There are two treatments, called RANDOM and CONTINGENT. In RANDOM, the baseline setting, the changes to wealth, referred to as wealth shocks in economics, are independent of the actual choices participants make. Under CONTINGENT, we induce the belief that the changes in income are a consequence of subjects' own decisions. The magnitudes and sequence of the shocks to wealth are identical between the CONTINGENT and RANDOM treatments. We investigated whether more loss aversion existed in one treatment than another. The behavioral results showed significantly greater loss aversion in CONTINGENT compared to RANDOM after a negative wealth shock. No differences were observed in the response to positive shocks. The fMRI results revealed a neural loss aversion network, comprising the bilateral striatum, amygdala and dorsal anterior cingulate cortex that was common to the CONTINGENT and RANDOM tasks. However, the ventral prefrontal cortex, primary somatosensory cortex and superior occipital cortex, showed greater activation in response to a negative change in wealth due to individual's own decisions than when the change was exogenous. These results indicate that striatum activation correlates with loss aversion independently of the source of the shock, and that the ventral prefrontal cortex (vPFC) codes the experimental manipulation of agency in one's actions influencing loss aversion.

Highlights

It is common for individuals to experience unanticipated changes to wealth
The post-hoc analysis (Duncan correction) revealed that theRun2-1 difference was significantly greater in CONTINGENT than in RANDOM, indicating a greater increase in loss aversion in CONTINGENT than in RANDOM
In the RANDOM task, the loss aversion coefficients (LAC) in Run21 and Run3-2 were not significantly different from each other. This shows that the average LAC in the CONTINGENT task was higher than in RANDOM

Summary

INTRODUCTION

It is common for individuals to experience unanticipated changes to wealth In economics, these are referred to as wealth shocks. One might receive a windfall, a positive wealth shock, in the form of an unanticipated pay increase, a holiday bonus, or an appreciation in the value of an investment Such wealth shocks may be small or large and can potentially influence financial decision-making through a variety of channels. The principal research question we consider is whether the source of a wealth shock influences how much the shock affects subsequently estimated levels of loss aversion, the unwillingness to accept a risk that may result in a loss. We compare the estimated loss aversion coefficient from the choice data between the two treatments, after both a negative and a positive wealth shock. We compare the level of brain activation in the ventral prefrontal cortex (vPFC) and the ventral striatum (VS), the two brain regions associated with loss aversion in previous studies (Tom et al, 2007; Brooks et al, 2010; Pammi et al, 2015)

Participants

Experimental Procedures

Behavioral Results

Imaging Results

DISCUSSION