Impact Of Loss Aversion Research Articles

Psychological Heterogeneity in a Queue: The Impact of Loss Aversion on Service Pricing

Psychological Heterogeneity in a Queue: The Impact of Loss Aversion on Service Pricing

Impact of loss aversion on financing mechanism preference under consignment: Direct vs. Guarantee

This study examines the impact of loss aversion on the retailer’s financing mechanism preference under the consignment contract in a supply chain consisting of a retailer and a capital-constrained supplier. Both the retailer and the supplier could be loss averse. To help the supplier overcome financial distress, two financing mechanisms are available for the retailer as follows. (1) direct financing (DF): the retailer directly provides loans to the supplier; (2) guarantee financing (GF): the retailer guarantees to repay a certain percentage of the supplier’s outstanding loan to the bank, and thereby the supplier can obtain a loan from the bank. By comparing different financing mechanisms, we show that the retailer always prefers GF over DF once his loss aversion level exceeds a threshold. We find that the differences in cash flows (i.e., losses and gains per period) between mechanisms are the driving force behind the impact of loss aversion in determining the relative preference of the financing mechanisms. More specifically, even when the sum of the losses and gains under DF is greater than that under GF, the absolute magnitude of losses under DF can be significantly greater than that under GF. In equilibrium, we have Furthermore, numerical studies show that the attractiveness of GF for the loss-averse retailer increases with the consignment rate and the production cost, and decreases with the supplier’s working capital. The results provide an explanation for the adoption of GF in practice business and can help managers map financing options to environments where they perform best.

The Impact of Loss Aversion and Endowment Effect on Self, Gender and Childrens Identity

This paper will be examining the effect of endowment effect and loss aversion on individuals through the lenses of self, gender and age, i.e. children, respectively. When examining the endowment effect on self-enhancing by an example of shopping, loss aversion and the endowment effect is found to be more intense to an individual when one is more conscious of self-threat (i.e. when prices are higher). Through the lenses of gender, there is a lack of evidence of whether loss aversion is more effective to one gender. However, there are quite a few studies that point to the fact that loss aversion has a relatively more negative impact on female, vice versa, ceteris paribus. In the situation of children, quite a lot studies have proved that endowment effect will not work on children unless someone lead them to focus on themselves, however, children will be obviously affected by loss aversion.

Loss Aversion and Protectionism

The concept of loss aversion in behavior economics was proposed by Kahneman and Tversky in 1979 with the famous prospect theory. Loss aversion is a cognitive bias suggesting that an avoidance of loss is preferred by people than an equivalent gain. The impact of loss aversion is profound in multiple areas of human life, including economics, society, politics, media, etc. This study aims to investigate the relation between loss aversion and trade policies, in particular, the implementation of protectionist trade policies. Literatures in the area of political economics about trade policy are reviewed. The Grossman-Helpman model, which predicts a set of determinants of trade policy, is discussed. Three empirical studies the U.S. steel industry, the U.S. Section 301 proceedings, and the Chinese cotton industry as well as the influence of loss aversion in each case, are analyzed and discussed in detail. Overall, the study draws its conclusion based on previous literatures and empirical studies, and it further confirms that loss aversion would lead to a risk-averse behavior of policy makers by reviewing empirical cases.

The Impact of Loss Aversion on Peoples Behavior in Different Markets

Loss aversion is an important psychological phenomenon. Adding loss aversion to the category of behavioral economics can well explain many phenomena that cannot be explained by general models. This paper reviews some relevant studies showing the application of loss aversion in the stock markets, real estate markets and COVID-19, and finds that loss aversion does influence people's decisions and the market as a whole. In the stock market, the combination of narrow framing and loss aversion leads to a shorter valuation period and investors reluctance to sell the stocks. Loss aversion in the real estate market will drive house sellers to set a higher price, and investors with more experience are even more loss aversion than inexperienced investors. In the context of COVID-19, emergency orders can improve their profits, and the time of blockade can be extended under the loss framing. In general, loss aversion makes people more reluctant to give up what they have, leading to higher trading prices and other problems. Thus, this paper corroborates that loss aversion has more explanatory power than general economic models in some aspects. Further analysis is needed as to how loss aversion can be used to predict and modify people's behavior.

The Impact of Loss Aversion on Corruption

The Impact of Loss Aversion on Corruption

The Impact of Loss Aversion and Diminishing Sensitivity on Airline Revenue: Price Sensitivity in Cabin Classes

While most businesses actively adopt a data-driven approach for revenue management decisions, understanding how air travelers perceive and behave differently to pricing strategies is essential for yielding optimal financial outcomes. This study analyzes the loss aversion and diminishing sensitivity mechanisms of prospect theory in economy and business cabin classes. With rich longitudinal airfares, regression models and revenue data (15,868 observations from the top-10 aviation routes in the world) from 2014 to 2019, this study finds that lower-(higher-)than-expected airfares have a positive (negative) impact on revenue. When the effect of loss-coded and gain-coded tickets were compared, the extent to which passengers avoided losses (vs. welcomed gains) had a greater impact on revenue, supporting that loss aversion applies to the airline revenue, especially for business passengers. This study contributes to the further refinement of prospect theory by showing that the loss aversion and diminishing sensitivity mechanisms manifest differently in each cabin class.

Optimal fine reductions for self-reporting: The impact of loss aversion

Fine reductions for self-reported offenses entail a potential trade-off. On the one hand, inducing offenders to self-report allows the social planner to save on enforcement costs and reduce harm through early detection. On the other hand, fine reductions may also reduce deterrence: offenders anticipate that if their detection probability turns out to be higher than initially expected, they can exploit the possibility of a more lenient sanction. We analyze how this trade-off is affected by the potential offender’s utility function, contrasting standard neoclassical preferences with loss aversion. For loss aversion, we apply the approach by Koszegi and Rabin (2006, 2007), in which reference points are determined by the ex ante expectations of equilibrium strategies. Assuming that the private benefit from crime is lost in case of detection, we distinguish between loss aversion in the fine dimension and in the benefit dimension. Intuitively, one might assume that loss aversion facilitates law enforcement because losses loom larger than gains, which sets incentives to refrain from crime. We show that a sufficient condition for this intuition to hold is that the degree of loss aversion in the fine dimension is weakly above the degree in the benefit dimension.

Study on Behavioural Biases of Investors: The Effect of Prospect Rules

Investment decisions of the investors are influenced by different objective and subjective factors. But we as investors ignore or not knowingly our emotions, feelings and sentiments make investment decisions. This disturbs our investment objective and the returns on investments gets effected. Hence, an attempt is made to understand the effect of prospect rules on investors’ investment decisions. The research methodology is descriptive and causal in nature. The sample for the study are the retail investors from Belagavi city. The data to study the effect will be collected through primary source by the questionnaire. The result of regression analysis showed that there was impact of loss aversion and disposition effect on investor’s investment decision. Even the way information is framed the investors get carried away by that, while making the decision of money to be invested. It was also found that less than 10% of the savings are getting invested by the investors. The results would be of use to the financial advisors and investors in knowing the subjective factors affecting their client’s money related decisions.

Optimal Fine Reductions for Self-Reporting: The Impact of Loss Aversion

Fine reductions for self-reported offenses entail a potential tradeoff. On the one hand, inducing offenders to self-report allows the social planner to save on enforcement costs and reduce harm through early detection. On the other hand, fine reductions may also reduce deterrence: offenders anticipate that if their probability of apprehension turns out to be higher than initially expected, they can exploit the possibility of a more lenient sanction. We analyze how this trade-off is affected by the offender's utility function, contrasting neoclassical standard preferences with loss aversion. For loss aversion, we apply the approach by Kőszegi and Rabin (2006), in which reference points are determined by the ex ante expectations of equilibrium strategies. Assuming that the private benefit from crime is lost in case of detection, we distinguish between loss aversion in the fine dimension and in the benefit dimension. Intuitively, one might assume that loss aversion facilitates law enforcement because losses loom larger than gains, which sets incentives to refrain from crime. This intuition, however, carries over to our model with self-reporting only if loss aversion in the fine dimension is sufficiently large compared to loss aversion in the benefit dimension.

The impact of loss aversion on optimal prevention

We analyze how loss aversion affects prevention in Koszegi and Rabin's (2007) choice-acclimating personal equilibrium. Individuals take into account the financial consequences of prevention but also expected sensations of disappointment or elation against a stochastic reference point. Loss aversion raises optimal prevention if the loss probability is below a threshold value and lowers it otherwise. We characterize this threshold and find that, under plausible conditions, it is large enough for the positive effect to dominate. We also introduce a status-quo bias, which makes individuals more sensitive to the occurrence of a loss. The status-quo bias increases the probability threshold, making the positive effect of loss aversion on prevention even more prevalent.

Loss aversion, overconfidence of investors and their impact on market performance evidence from the US stock markets

Purpose The current study aims to investigate the impacts of two behavioral biases, namely, loss aversion and overconfidence on the performance of US companies. First, the impact of loss aversion on the economic performance of companies was assessed. Second, the impact of overconfidence on market performance was discussed. Design/methodology/approach This study used around 6,777 quarterly observations on the population of US-insured industrial and services companies over the 2006-2016 period. Ordinary least squares (OLS) regression in two panel data models were used to test the hypotheses formulated for the study. Findings It was documented that the loss-aversion bias negatively affects the economic performance of companies and this is achieved for both sectors. In contrast, the findings suggest that overconfidence positively affects market performance of industrial firms but negatively affects market performance in service firms. Further robust evidence was found that overconfidence bias seems to be dominant, and hence, investors may tend to be more overconfident rather than more loss-averse. Originality/value This research can be extended by focusing on the following question: What is the impact of the contradictory (positive and negative) effects of an investor's loss aversion and overconfidence on the US company performance in case of realization of a stock market crisis or stock market crash?

Decision making in trade credit financing: impact of loss aversion and power imbalance

AbstractWe incorporate loss aversion and power imbalance into a trade credit contract that sets both wholesale price and payment ratio at ordering time. Our models are based on a dyadic supply chain consisting of a loss‐averse supplier and a capital‐constrained retailer who can get finance via bank credit or trade credit. We derive the optimal trade credit contract under the retailer‐dominant noncooperative (RDN) and the supplier‐dominant noncooperative (SDN) games. Our results show that the impact of the supplier's loss aversion depends on whether the supplier dominates the supply chain. Specifically, under RDN scenario, a single bank credit should be adopted by the retailer, irrespective of the supplier's loss aversion. Under SDN scenario, however, a hybrid of bank credit and trade credit should be provided to the retailer when the supplier's loss aversion level exceeds a critical threshold value, and a single trade credit should be granted otherwise. Moreover, we find that the capital‐constrained retailer may benefit from the supplier's loss aversion behavior. Finally, we conduct a serial of numerical examples to develop more managerial insights.

Credibilistic Bimatrix Games with Loss Aversion and Triangular Fuzzy Payoffs

Bimatrix games are reconsidered under assumption that players are loss averse and payoffs are fuzzy, where reference points are given exogenously. The impact of loss aversion on bimatrix game is investigated by applying credibility theory. Three solution concepts of credibilistic loss aversion Nash equilibria (i.e., expected loss aversion Nash equilibrium, optimistic loss aversion Nash equilibrium and pessimistic loss aversion Nash equilibrium) and their existence theorems are proposed. The sufficient and necessary conditions are presented to find three equilibria. It is found that three credibilistic loss aversion Nash equilibria are equivalent if confidence level is equal to 0.5. Furthermore, an analysis on credibilistic loss aversion equilibria with respect to loss aversion is performed in a 2 × 2 bimatrix game with triangular fuzzy payoffs. It is found that with a higher probability a more loss-averse player receives a preferred payoff in the mixed strategy Nash equilibrium in some situations, but receives the second highest payoff in other situations. Finally, a case study is shown to illustrate the validity of the bimatrix game with triangular fuzzy payoffs developed in this paper.

Procurement Contract Design in Global Infrastructure Projects: The Impact of Loss Aversion

A growing number of governments are persuading private firms to build and operate infrastructure projects for them. Since the initial contract between the government and firm is based on forecasted demand, the government can renegotiate to adjust it after demand is realized. We use stylized modelling to study whether the government should offer the firm a flexible contract that allows ex post renegotiation or a rigid contract when the private firm is loss-averse. Our model results show that the government’s decision depends on two key factors: demand uncertainty and the firm’s loss aversion. We further investigate whether the government should renegotiate the subsidy or concession period. We find that such a decision depends on the improvement in social welfare after the project transfer. To offer operational insights into the mitigation of the social welfare loss by promoting renegotiation, we discuss three strategies that the government can use: imposing a tax rate, running a competing domestic project, and offering a dollar-based subsidy. We describe the conditions under which these three strategies are conducive to renegotiation as well as their effects on the initial contract.

Impact of Loss-Aversion on a Financially-Constrained Supply Chain

Traditionally, in the area of production and operations management, the financial states and decision-makers’ behaviour regarding loss have been ignored in the supply chain, which may lead to infeasible or unrealistic practices or even catastrophic losses in practical supply chain operations. Therefore, this study aims to provide a model for operational efficiency in a financially constrained supply-chain system consisting of a financially deficient retailer, a supplier, and a bank, and to analyse the impact of the behaviour of the bank and the supplier on the operational decision. It is assumed that the bank provides a loan to the retailer considering the supplier’s credit guarantee for the retailer. The supplier’s credit guarantee implies that, if the retailer goes bankrupt after the sales season, then a pre-guaranteed proportion of the retailer’s loan is repaid by the supplier. Moreover, to capture the decision-makers’ behaviour regarding loss, it is assumed that the supplier and the bank are loss-averse in their risk preference on the final profit. Under this circumstance, it is intended to draw the theoretical implications by analysing a loss-averse behaviour model for a supplier and a bank, in which a kinked piecewise linear and concave utility function is considered. The optimal decision is analytically derived for the retailer (the optimal order quantity), the supplier (the optimal wholesale price), and the bank (the optimal interest rate). In addition, a sensitivity analysis is conducted to investigate how the model parameters affect the optimal decision for the retailer, the supplier, and the bank under different degrees of loss-aversion. The optimal decisions are shown to be highly affected by the degree of the loss-aversion coefficient of the bank and the supplier and to be more conservative than the result in the traditional case which optimises the risk-neutral expected profit (the unit degree of loss-aversion). The analytical results can be summarised as follows. First, as the wholesale price and the interest rate increase, the optimal order quantity decreases. Second, the more loss-averse the supplier is, the higher the optimal wholesale price that is offered to the retailer by the supplier. Third, the larger the credit guarantee that is provided to the retailer by the supplier, the higher the optimal wholesale price that is provided to the retailer. Fourth, the more loss-averse the bank is, the higher the interest rate that is offered to the retailer; and the larger the credit guarantee that is provided by the supplier, the lower the interest rate that is offered to the retailer.

Loss Aversion and Market Liquidity in the Real Estate Market

The most commonly observed risk averse behavior in the commercial real estate market is loss aversion on the part of investors; i.e., investors are more sensitive to prospective losses than to prospective gains. This observation leads to the natural question : Does the market rationally anticipate investors' loss aversion? If not, then does loss aversion become stronger in a relatively illiquid market? The answer to these questions provides strategically important implications to institutional investors. We propose to explore the impact of loss aversion on the commercial real estate market by testing two competing hypotheses : (1) the rational market expectation hypothesis and (2) the liquidity spiral hypothesis. The rational market expectation hypothesis holds that the market rationally anticipates investors' behavioral loss aversion. As a result, the interaction between lagged market liquidity and loss aversion does not have an impact on the probability of property sales. On the other hand, the liquidity spiral hypothesis holds that the interaction between market liquidity and loss aversion has an impact on the probability of property sales due to the self-fulfilling feedback effect between loss aversion and market liquidity. In the context of REITs' property transactions, we find partial evidence for the liquidity spiral hypothesis : private market liquidity and stock market liquidity each has an additional impact on the sale probability of property.

Direct Subsidy or Tax Break? The Impact of Loss Aversion in Choosing Incentives for Entrepreneurs.

Across three studies, we found that direct subsidies were more effective than tax breaks in encouraging prospective entrepreneurs. Nevertheless, people who were asked to choose the policy that would encourage more entrepreneurial behavior showed indifference between the use of tax breaks and direct subsidies as a means to that end. Entrepreneurs favored direct subsidies because they felt that direct subsidies would better minimize potential losses. Meanwhile, policy-makers were more willing to adopt tax breaks because they believed tax breaks were more effective in minimizing an entrepreneur’s potential losses. Together, these studies provide evidence that direct subsidies are more effective than tax breaks when encouraging entrepreneurial behavior, point to a psychological asymmetry between policy- makers and their constituents that has serious consequences, and open up new paths for future research.

Stretch It But Don't Break It: The Hidden Risk of Contract Framing.

Recent research suggests that loss framed contracts are an effective instrument for principals to maximize the effort of their agents. Framing effects arise from defining thresholds that vary the salience of losses and gains while preserving payoff equivalence of the underlying contract. While under Prospect Theory a loss frame should lead to more effort we show that contract thresholds also exert a suggestive effect on performance that can trump the impact of loss aversion. Loss framing therefore carries a risk. As agents focus their effort choice on the expressed thresholds, poorly selected thresholds reduce effort and the principal might prefer offering a contract that does not impose a threshold at all. On the other hand, imposing demanding thresholds may push effort beyond levels predicted by Prospect Theory.

Impact of loss aversion on the newsvendor game with product substitution

Abstract This paper studies a newsvendor game in which two substitutable products are sold by two different retailers (newsvendors) with loss-averse preferences. Each loss-averse retailer facing stochastic customer demand and deterministic substitution rate will make an order quantity decision to maximize his expected utility. Since product substitution causes two retailers to make decisions in a competitive environment, game theory is used to find the retailers' optimal order quantities. It is shown that under certain conditions, there exists a unique Nash equilibrium in the newsvendor game. Under a symmetry assumption, each retailer's equilibrium order quantity is decreasing in the loss aversion coefficient and increasing in the substitution rate. Further, if the effect of loss aversion on the order quantity is strong enough to dominate the effect of competition, the total inventory level of a decentralized supply chain will be lower than that of a centralized supply chain. Numerical experiments are conducted to illustrate our results.