Individual Loss Aversion Research Articles

The Impact of Social Settings on Loss Aversion

With the continuous development of society, the demand for communication in social settings has been steadily increasing in people's daily lives, leading to increasingly complex interpersonal relationships. Numerous studies have indicated that the expansion of interpersonal relationships influences the degree of individual loss aversion. Therefore, based on existing literature, we hypothesized that the social environment may have an impact on the level of loss aversion. To test our hypothesis, we conducted a questionnaire survey (N=157). We used grades and monetary variables as independent variables and assessed participants' levels of loss aversion through a scoring system. Our data analysis revealed that individuals are more likely to exhibit loss aversion in isolated environments compared to when they are in social settings. Furthermore, based on a review of previous research and data analysis, we speculate that a collectivist cultural background may be a significant factor contributing to these findings. Additionally, in cultures and regions where individualism prevails, individuals may be more inclined to exhibit loss aversion in social situations.

Which measures predict risk taking in a multi-stage controlled investment decision process?

We assess the ability of different risk profiling measures to predict risk taking along a multistage process that reflects individuals’ discovery of their willingness to take risks. We find that the individual willingness to take risks varies along the process, but its level is always related to a composite measure of the individual risk tolerance. Assessment of the risk tolerance cannot be substituted by a simulated experience, although the latter can improve the perception of the risk and reward potential of the investment and motivate higher risk taking. The risk tolerance measure addresses different notions of risk, but we found that the individual loss aversion is the most powerful predictor of risk taking at all stages of the discovery process. By contrast, we found that neither the self-assessed risk tolerance measures nor the investment experience are suitable for consistently predicting risk taking at different stages of the process.

Bid outcome processing in Vickrey auctions: An ERP study.

Online retailers often sell products using a socially competitive second-price sealed-bid auction known as a Vickrey auction (VA), an incentivized demand-revealing mechanism used to elicit players' subjective values. The VA presents a situation of risky decision-making, which typically implements value processing and a loss aversion mechanism. Neural outcome processing of VA bids are not known; this study explores this for the first time using EEG. Twenty-eight healthy participants bid on household items against an anonymous, computerized opponent. Bid outcome event-related potentials were predicted to differentiate between three conditions: outbid (no-win), large margin win (bargain), and small margin win (snatch). Individual loss aversion values were evaluated in a separate behavioral experiment offering gains or losses of variable amounts but equal chances against an assured gain. Processing outcomes of VA bids were associated with a feedback-related negativity (FRN) potential with a spatial maximum at the vertex (251-271 ms), where bargain win trials resulted in greater FRN amplitudes than snatch win trials. Additionally, a P300 potential was sensitive to win versus no-win outcomes and to retail price. Individual loss aversion level did not correlate with the strength of FRN or P300. Results show that outcome processing in a VA is associated with FRN that differentiates between relatively advantageous and less advantageous gains, and a P300 that distinguishes between the more and less expensive auction items. Our findings pave the way to an objective exploration of economic decision-making and purchasing behavior involving a widely popular auction.

Tailored Cigarette Warning Messages: How Individualized Loss Aversion and Delay Discounting Rates Can Influence Perceived Message Effectiveness.

Current text-only cigarette warning labels (long-term, loss-framed messages) may not motivate positive changes in smoking behavior. The current project was a cross-sectional study examining the effects of tailored cigarette warnings on perceived message effectiveness (PME) in adult smokers (n = 512) conducted using Amazon Mechanical Turk (M-Turk) in January–February 2020. Participants were an average age of 40.7 (SD = 11.6), with the majority of the sample being female (62.2%) and White (88.9%). Participants reported smoking an average of 14.6 cigarettes/day (SD = 9.2) with an average FTND score of 4.6 (SD = 2.2). Participants were asked to complete a tobacco use history questionnaire, and mixed gambles and delay discounting tasks before random assignment to one of five message groups. The groups were based on a 2 (gain versus loss framing) ×2 (short-term versus long-term framing) between-subject design; a fifth group served as the control group. All experimental messages reported higher PME scores than the control (p values < 0.001, Cohen’s d = 1.88–2.48). Participants with shallower delayed reward discounting and lower loss aversion rates reported higher total PME scores, p values < 0.05. Our findings also suggest that loss aversion rates vary widely among smokers and that individuals are more responsive to messages congruent with their behavioral economic profile. Specifically, smokers who viewed messages congruent with their loss aversion and delay discounting rates reported higher PME scores than those who viewed incongruent messages (p = 0.04, Cohen’s d = 0.24). These preliminary findings suggest that anti-smoking campaigns may best impact smokers by tailoring messages based on individual loss aversion and delay discounting rates versus a one-size-fits-all approach.

Contract Compliance Under Biased Expectations

Contract compliance is key for economic growth. However, determinants affecting contract breach are not yet well understood. In this paper, we focus on contract situations with a potential hold-up problem, such as contract farming agreements which are prevalent in many developing countries. We examine if agents' payoff expectations serve as a reference point affecting (non-)compliant behavior by inducing a subjective loss when the agent compares the realized payoff and the expected payoff from the contract. Results from our lab experiment in Ghana indicate that overconfident agents, i.e., agents with relatively high payoff expectations, breach more often than underconfident agents, i.e., agents with relatively low payoff expectations. Moreover, more pronounced individual loss aversion amplifies the effect of subjective losses on contract breach. In a treatment, we manipulate agents' overestimation exogenously and use it as an instrument to demonstrate that the reported effects are causal.

Association of degree of loss aversion and grey matter volume in superior frontal gyrus by voxel-based morphometry.

Loss-aversion behaviors reflect individuals' personal preference bias when they meet uncertainties and measure the potential gains and losses of the uncertain situations before making a decision. Such behaviors are common and well documented in daily life; one example is irrational financial investments. The exact neural mechanisms for these loss-aversion behaviors have been widely discussed. In this study, we explored the neural mechanisms of loss-aversion behaviors by using voxel-based morphometry of brain regions based on two datasets. In the behavioral analysis, the degree of individual behavioral loss aversion was measured. Voxel-based morphometry analysis revealed positive correlations between the degree of individual behavioral loss aversion and grey matter volume in the superior frontal gyrus, which may be crucial neural structures for individual loss-aversion behaviors.

Effects of loss aversion on neural responses to loss outcomes: An event-related potential study

Loss aversion is the tendency to prefer avoiding losses over acquiring gains of the same amount. To shed light on the spatio-temporal processes underlying loss aversion, we analysed the associations between individual loss aversion and electrophysiological responses to loss and gain outcomes in a monetary gamble task.Electroencephalographic feedback-related negativity (FRN) was computed in 29 healthy participants as the difference in electrical potentials between losses and gains. Loss aversion was evaluated using non-linear parametric fitting of choices in a separate gamble task.Loss aversion correlated positively with FRN amplitude (233–263ms) at electrodes covering the lower face. Feedback related potentials were modelled by five equivalent source dipoles. From these dipoles, stronger activity in a source located in the orbitofrontal cortex was associated with loss aversion.The results suggest that loss aversion implemented during risky decision making is related to a valuation process in the orbitofrontal cortex, which manifests during learning choice outcomes.

Choking under time pressure: The influence of deadline-dependent bonus and malus incentive schemes on performance

Many economically relevant activities are executed under notable time pressures. Incentivized deadlines are often the reason people feel pressured. In such an environment, individual preferences can predict performance. Through a laboratory experiment, we examine the predictive power of individual loss aversion on performance under deadline-dependent incentives. Participants worked on a real effort task under two payoff-equivalent contracts framed in bonus and malus terms. The results show lower performance for individuals with high loss aversion when working under a malus contract. These individuals needed more time to reply and were less able to avoid maluses than other individuals. Choking can explain this observed behavior.

Loss aversion is associated with bilateral insula volume. A voxel based morphometry study

Loss aversion is a decision bias, reflecting a greater sensitivity to losses than to gains in a decision situation. Recent neuroscientific research has shown that mesocorticolimbic structures like ventromedial prefrontal cortex and the ventral striatum constitute a bidirectional neural system that processes gains and losses and exhibits a neural basis of loss aversion. On a functional and structural level, the amygdala and insula also seem to play an important role in the processing of loss averse behavior. By applying voxel-based morphometry to structural brain images in N=41 healthy participants, the current study provides further evidence for the relationship of brain structure and loss aversion. The results show a negative correlation of gray matter volume in bilateral posterior insula as well as left medial frontal gyrus with individual loss aversion. Hence, higher loss aversion is associated with lower gray matter volume in these brain areas. Both structures have been discussed to play important roles in the brain’s salience network, where the posterior insula is involved in interoception and the detection of salience. The medial frontal gyrus might impact decision making through its dense connections with the anterior cingulate cortex. A possible explanation for the present finding is that structural differences in these regions alter the processing of losses and salience, possibly biasing decision making towards avoidance of negative outcomes.

Too Little, Too Late? Monetary Policymaking Inertia and Psychology: A Behavioral Modeler

Can the inertia in the monetary policymaking be attributed to psychological drivers? Our model shows two results. First, our baseline model with individual loss aversion explains inertia in a monetary policy committee (MPC) where holds a de jure majority rule. Second, our second model shows that introducing a specification of loss aversion for all members in a MPC leads to inertial decisions when status-quo inflation is below the inflation target. Conversely when status-quo inflation is above the target rate, inertial policy does not occur until the level of inflation discounts the loss aversion mechanism. In the framework of a hawk-dove dimension we conclude that loss aversion favors inertial monetary policy.