Loss Aversion Research Articles

The Relative Importance of the Contrast and Assimilation Effects in Decisions Under Risk

ABSTRACTPast research on decisions under risk has documented two contradictory context effects: the contrast effect, where risk preferences in “target” tasks diverge from those in previous “surrounding” tasks, and the assimilation effect that implies the opposite bias. We present four web experiments (three preregistered) that clarify the conditions determining the relative prominence of these opposing effects. Our experiments focus on choice patterns in “target” tasks where participants choose between the status quo and a risky mixed gamble with an expected value of zero. Study 1 examines the impact of surroundings that differ from the target task with respect to the expected benefit from risk‐taking. The findings reveal a strong contrast effect: Decreasing the attractiveness of risk‐taking in the surrounding tasks increased the risk‐taking rate in the target tasks from 53.2% to 79.7%. Study 2 investigates the impact of surroundings that differ in the payoff domain. The findings indicate a strong assimilation effect: Decreasing the attractiveness of risk‐taking in the surrounding tasks decreased the risk‐taking rate in the target tasks from 74.7% to 36.5%. Additionally, the results revealed unpredicted and robust reversed loss aversion patterns which Studies 3 and 4 further clarify. Our findings (1) suggest that the isolated within‐task computations assumed by leading descriptive models overlook substantial contextual considerations, (2) clarify the factors determining the impact of the contrast and assimilation effects in decisions under risk, and (3) provide a theoretical framework for making useful predictions in various scenarios.

Behavioral Biases and Decision-Making in Investment among working individuals in the education sector

This study investigates the impact of behavioral biases on investment decisions among working individuals within the education sector. Behavioral finance theory serves as the theoretical foundation, emphasizing the role of psychological factors in shaping investment choices. The study employs a mixed-methods approach, combining surveys and in-depth interviews to gain insights into the investment behavior of educators, administrators, and support staff. Our findings reveal that a range of behavioral biases, including loss aversion, overconfidence, and herding, significantly influence investment decisions. Working professionals in the education sector often exhibit a strong preference for conservative investment strategies, even when market conditions may suggest otherwise. Psychological factors, such as fear of losses and a tendency to follow trends, play a vital role in shaping investment behavior. These biases are further exacerbated by a lack of financial literacy and investment education. The implications of this research suggest a need for targeted financial education programs to mitigate behavioral biases and enhance decision-making among working individuals in the education sector. Addressing these biases can lead to more informed and diversified investment strategies, potentially improving financial security and long-term wealth accumulation for this demographic. This abstract provides a brief overview of the research focus, methodology, key findings, and the potential implications of the study. It gives readers a clear understanding of the research's scope and significance.

Behaviourally-informed two-way text messaging to improve return to HIV care in South Africa: evidence from a randomised controlled trial.

One-way text messaging to re-engage people in HIV care has shown promise, but little is known about two-way messaging where the recipient is asked to respond. We evaluated a two-way text messaging intervention, informed by behavioural science, to increase re-engagement in care following missed antiretroviral therapy (ART) visits. We conducted an individual-level randomised controlled trial between February and March 2023 in Capricorn District, South Africa. Adults aged ≥18 years who had missed an ART visit by >28 days were randomised to (1) a standard one-way text message, or (2) behaviourally informed two-way text messages. Two-way messages asked recipients to reply by selecting from a list of reasons for their missed visit. Those who responded received another text message tailored to their response and designed using behavioural economics principles (affect heuristic, availability heuristic, loss aversion, social norms, providing slack, expanding choice). The primary outcome was return to care within 45 days, analysed as 1) intention to treat, and 2) restricted to successful message delivery. 3,695 participants were randomised: 1,845 to the one-way message group and 1,850 to the two-way message group. 27.9% (515/1845) of participants sent a one-way message and 27.2% (503/1850) sent a two-way message returned for an ART visit within 45 days (proportion difference:-0.7%, p-value: 0.622). In an analysis restricted to participants whose text message was delivered, 28.3% (310/1094) in the one-way message group compared to 28.3% (304/1076) in the two-way message group returned to care (proportion difference:-0.09%, p-value: 0.966). 19.5% (210/1076) responded to the two-way message. The two most commonly reported reasons for missed appointments were being out of town (41.0%) and still having medication (31.0%.). Among those who responded, 27.1% (95%CI: 21.3-33.7) returned for an ART visit. Clients ≥50 years were less likely to respond to the two-way text message, (AOR 0.4; 95%CI: 0.2-0.9). Behaviourally informed two-way text messages did not improve return to care over one-way messages. However, they elicited reasons for disengagement, which could inform future outreach for missed visits. Additional research is needed on the mode, content and timing of two-way messages intended to increase return to care. PACTR202202748760768 & DOH-27-042022-6703.

Behavioral risk profiling: Measuring loss aversion of individual investors

Loss aversion has been shown to be a key driver of people's investment decisions. Encouraged by regulators, financial institutions are seeking ways to integrate this behavioral factor into client risk classifications. A critical obstacle is the lack of a valid measurement method for loss aversion that can be straightforwardly incorporated into existing processes. This paper reports on two large-scale implementations of such a method within the risk-profiling application of an established financial institution. We elicit loss aversion for 1,040 employees and 3,740 clients, observing distributions that align with existing findings. Importantly, our results demonstrate that loss aversion is largely independent of the risk-return preferences commonly used for investor classification. Furthermore, the correlations we observe between these two preferences and individuals’ background characteristics align with previous research: loss aversion is strongly correlated with education—higher educated individuals exhibit greater loss aversion—whereas risk aversion is related to gender, age, and financial status—women, older individuals, and those less financially secure are more risk averse. These findings support the conjecture that risk and loss aversion are complementary in capturing investor intent.

Preferences for index-based pasture insurance: a choice experiment in Limpopo Province, South Africa

ABSTRACT South African subsistence livestock farmers rely heavily on traditional mitigation and coping mechanisms to deal with the effects of drought. However, these methods have proven ineffective in managing the full impact of drought. Consequently, policymakers are increasingly interested in promoting Index-based Pasture Insurance (IBPI). This paper aims to assess subsistence livestock farmers' preferences for IBPI. A simple random sampling method was used to select 110 subsistence livestock farmers for data collection. A discrete choice experiment—Conditional Logit and Latent Class models and incentivized lottery games were used to elicit preferences for insurance contracts and loss aversion. The findings indicate that subsistence livestock farmers have a favourable attitude toward IBPI contracts that protect against drought-related pasture degradation. The Conditional Logit model shows that farmers prefer transparent contracts that reimburse with feed and vouchers rather than cash. However, they derive negative marginal utility from basis risk and premium. However, the Latent Class model reveals heterogeneous preferences for IBPI among farmers. Farmers are also loss-averse, but loss aversion did not influence their preference for IBPI. Therefore, the primary recommendation for insurance providers is to consider customizing IBPI attributes to increase adoption among subsistence farmers.

Induced worry increases risk aversion in patients with generalized anxiety

Generalized anxiety disorder is characterized by disruptions in decision-making, including an enhanced aversion to uncertain outcomes (i.e., risk aversion), which is not specific to negative outcomes (i.e., no loss aversion). It is unknown if this uncertainty bias is a trait-like causal factor contributing to anxiety symptoms, or a state-like feature triggered by anxiety symptoms such as worry chains. Here, in-patients with Major Depression Disorder (MDD), with (N = 16) or without (N = 24) Generalized anxiety (GA) symptoms, and healthy controls (N = 23), completed an economic decision-making task before and after worry induction. They were asked to choose between a certain monetary payoff, and an uncertain gamble, allowing for estimation of risk and loss aversion through a computational prospect-theoretic model. There were no significant differences in risk and loss aversion between any of the three groups at baseline. After worry induction, patients with GA symptoms, compared to those without, showed increased risk aversion. This increase was modulated by the severity of anxiety symptoms. These findings suggest that decision-making disruptions in anxiety disorder may be driven by anxiety symptoms such as worry, rather than causing them. This could shape etiological models, motivate standardization of emotional state in research on decision-making in anxiety disorders, support treatment strategies primarily aimed at worry management, and could guide novel interventions focusing on uncertainty exposure across aversive and appetitive domains.

Changes in Traffic Jams and Injuries Impact on Acceptability of Automated Vehicles: A Strong Curvilinear Relation with no signs of Loss Aversion.

We investigate whether the acceptance of autonomous trucks as a function of their impact on traffic jams and injury rates are affected by loss aversion and diminishing sensitivity as described in prospect theory. In an online survey (N = 447), we presented randomised sets of values the replacement of human truck drivers would have on traffic jams and injuries. Adjusting for loss aversion provides no additional explained variance in the model, but adjusting for diminishing sensitivity does.

Religion, personality, or none of them? Exploratory evidence on their correlations with economic preference parameters.

Previous empirical research in the social sciences suggests sizable differences across religious denominations for various outcomes of interest, such as educational attainment, marital stability, wealth, or fertility. A small body of previous experimental literature has investigated possible differences in economic preference parameters (including time preference and risk attitude) between religious denominations that might explain those differences. This research adds to the extant literature on religion and preferences by including information on subjects' Big Five personality traits and analyzing potential correlations with loss aversion. It combines experimental data from incentivized choices with information on religious affiliation during high school and Big Five personality traits to test for possible correlations of religious denomination with risk attitude, time preference, and loss aversion, using Bayesian analysis of variance (ANOVA) and Bayesian regression analysis. Bayesian ANOVA results suggest no preference differences between the religions analyzed in this research. When controlling for Big Five personality traits and a host of other background variables, Bayesian regression results suggest no effects of either religious affiliation or Big Five personality traits measures on the three economic preference parameters analyzed here. These findings highlight the complexity of the relationship between religion, personality traits, and economic preference parameters, suggesting that previously observed differences may be influenced by the preference measures used or other unobserved factors.

Applying behavioural economics principles to increase demand for free HIV testing services at private doctor-led clinics in Johannesburg, South Africa: A randomised controlled trial.

Expanding free HIV testing service (HTS) access to include private clinics could increase testing rates. A donor funded programme, GP Care Cell, offered free HIV testing at selected private doctor-led clinics but uptake was low. We investigated whether HTS demand creation materials that used behavioural economics principles could increase demand for HIV testing at these clinics. We conducted a randomised controlled trial in Johannesburg, South Africa (January-April 2022) distributing brochures promoting HTS to adults in five private doctor-led clinic catchment areas. Individuals were randomised to receive three brochure types: (1) "Standard of care" (SOC) advertising a free HIV test and ART; (2) "Healthy lifestyle screening" promoted free low-cost health screenings in addition to HTS; and (3) "Recipient of care voucher" leveraged loss aversion and the endowment effect by highlighting the monetary value of free HTS. The primary outcome was presenting at the clinic following exposure to the brochures. Logistic regression compared outcomes between arms. We found that of the 12,129 brochures distributed, 658 were excluded because of errors or duplicates and 11,471 were analysed. About 59% of brochure recipients were male and 50,3% were aged 25-34 years. In total, 448 (3.9%) brochure recipients presented at the private doctor-led clinics of which 50.7% were males. There were no significant differences in clinic presentation between the healthy lifestyle screening and SOC arm (Adjusted Odds Ratio [AOR] 1.02; 95% CI 0.79-1.32), and similarly between the recipient of care voucher and SOC arm (AOR 1.08; 95% CI 0.84-1.39). Individuals were more likely to attend centrally-located clinics that had visible HTS branding (AOR = 5.30; 95% CI: 4.14-6.79). Brochures that used behavioural insights did not increase demand for HTS at private doctor-led clinics. However, consistent distribution of the brochures may have potential to increase HIV testing uptake at highly visible private doctor-led clinics.

Reprint of: Clustering of behavioral economic biases in decision-making and risk for cigarette smoking and other substance use in women and men

BackgroundLow loss aversion (LA) and high delay discounting (DD) are behavioral-economic decision-making biases that independently predict cigarette smoking and other risky substance use. Here we examine (1) whether low-LA and high-DD co-occur, (2) does co-occurrence increase the odds of current smoking and other substance use compared to only low-LA, high-DD, or neither; and (3) potential gender differences in these associations. MethodData are from five studies with U.S. adults who currently smoked or never-smoked cigarettes recruited using online convenience sampling matching on gender and education. Participants completed identical sociodemographic, substance use (cigarette, other drugs, alcohol), and LA (hypothetical 50–50 gambles) and DD (monetary-choice questionnaire) measures. LA and DD scores were dichotomized as low and high using Receiver-Operating-Characteristic Curve logistic regression. ResultsLA and DD each independently predicted substance use and with few exceptions were not influenced by gender. Low-LA compared to high-LA predicted two-fold greater odds of co-occurring high-DD (AOR = 2.120, 95%CI:1.749–2.571, p < .0001). Similarly, high-DD compared to low DD predicted two-fold greater odds of low-LA (AOR = 2.118, 95%CI:1.747–2.568, p < .0001). Among those with co-occurring low-LA and high-DD, odds of substance use were 5–10 times greater than those exhibiting neither, and 2–3 times greater than those exhibiting only low-LA or high-DD. ConclusionsLow-LA and high-DD cluster in women and men such that exhibiting one of these decision-making biases doubles the odds of exhibiting the other. These results demonstrate reliable clustering of low-LA and high-DD and a striking increase in risk for substance use relative to having only one or neither decision-making bias.

Reference-dependent discounting

Reference-dependence has become a widely established phenomenon in decision making under risk, not only for monetary outcomes but also for other outcomes, e.g., related to health. However, when the prospects involve risk about timing (the time of receipt of outcomes), rather than the outcomes themselves, much less is known about reference-dependence. This study extends discounted utility to incorporate reference-dependence and is the first to test it in timing prospects. We are also the first to estimate the probability weighting function for timing prospects. For both timing and outcome risk tasks, we replicate the typical fourfold pattern of risk attitudes: risk seeking for low-probability gains, risk aversion for high-probability gains, risk aversion for low-probability losses and risk seeking for high-probability losses. In other words, we find substantial pessimism with regard to high probabilities in the gain domain and low probabilities in the loss domain, and probabilistic optimism for low probabilities in the gain domain and high probabilities in the loss domain. Furthermore, we report loss aversion for outcome risks, while for timing risks, we find the opposite result, which we term earliness seeking. In sum, we find substantial empirical support for reference-dependent discounting. Our results show that psychological biases are also important when timing is risky, although the direction of bias may differ.

Age matters: The effect of regret and loss aversion on cultured meat acceptance

Cultured meat shows great promise as a more sustainable alternative to conventional meat consumption. However, consumer acceptance of cultured meat remains a great challenge as studies indicate a general reluctance to adopt this product. Notably, while existing literature has provided various factors influencing consumer acceptance of cultured meat, there is a limited focus on the use of affective cues. The present research examines the impact of regret appeal on consumers' willingness to try cultured meat. In two experimental studies, the authors investigate (1) the interactive effect between regret and age on willingness to try cultured meat, and (2) the role of loss aversion as a mediating factor between regret and willingness to try cultured meat. The results demonstrate the effectiveness of regret appeal in increasing consumers’ willingness to try cultured meat, particularly among older populations. This is because older populations exhibit higher levels of loss aversion. The present study is the first to shed light on the interactive effect of regret and age in influencing sustainable product acceptance. Furthermore, the study establishes the first empirical evidence to demonstrate that loss aversion is a valid self-regulating strategy adopted to cope with the feeling of regret in a consumption context.

The Impact of Investor Expectation on the Financial Decision-Making

Unlike traditional finance, behavioral finance challenges the traditional financial theory of investor rationality, emphasizing that investors are not absolutely rational in real life. This perspective provides new insights for understanding and predicting financial markets. This study examines core concepts in behavioral finance, such as loss aversion, market anomalies, momentum effects, reversal effects, endowment effects, and framing effects, and analyzes how they influence investors' financial decisions. These concepts highlight the significant role of human psychology and behavior in shaping financial decisions, thus aiding investors in making more rational choices in complex financial markets. Loss aversion, for instance, suggests that investors are more sensitive to losses than to gains, leading to suboptimal decision-making. Market anomalies, such as price bubbles and crashes, indicate that markets are not always efficient. Momentum effects suggest that past stock performance can predict future trends, while reversal effects point to the tendency of extreme stock performances to revert to the mean. The endowment effect reveals that individuals value their own possessions more highly than similar items they do not own. Lastly, framing effects demonstrate how the presentation of information can influence decision-making. Future research can delve deeper into how the framing effect can be harnessed to improve the design and marketing strategies of financial products, thereby enhancing the efficiency and effectiveness of investment decisions. This exploration could lead to more sophisticated financial products and better-informed investors, ultimately contributing to a more stable and efficient financial market.

Optimal Social Security with Loss Aversion

This article characterizes optimal social security in economies with agents who exhibit loss aversion. Two forms of loss aversion are explored. In the first, workers have a fixed retirement age and are loss averse over private savings. This motivates a more generous social security program. In the second, workers do no private savings but can choose their retirement age, exhibiting loss aversion over the foregone leisure time from delayed retirement. Social security benefits consequently rise steeper with retirement age and an earlier normal retirement age is optimal. In both cases, optimal policy is highly sensitive to the introduction of loss averse preferences.

The relationship between emotional biases and investment decisions: a meta-analysis

PurposeThe study attempts to investigate the relationship between emotional biases (loss aversion bias, overconfidence bias, and regret aversion bias) and investment decisions through a meta-analysis approach.Design/methodology/approachA meta-correlation analysis was done using sample size and correlation (r) data from several relevant studies that look at how emotional biases (loss aversion bias, regret aversion bias, and overconfidence bias) affect investment decisions. Additionally, beta coefficients (ß) were also converted to correlation coefficients (r) from six studies.FindingsThis study analysed 31 empirical studies and found a significant positive correlation between emotional biases and investment decisions [loss aversion bias (r = 0.492), regret aversion bias (r = 0.401), and overconfidence bias (r = 0.346)]. We set the statistical significance threshold at 0.05.Research limitations/implicationsThe review covered 31 online research publications that showed significant heterogeneity, possibly influenced by various methodological, population, or other factors. Furthermore, the use of correlational data restricts the ability to establish causation.Originality/valueThis is a novel attempt to integrate the results of various studies through meta-analysis on the relation between these emotional biases (loss aversion, overconfidence, and regret aversion) and investment decisions.

From mindset to market: unveiling the nexus of cognition, behavior and environment in igniting students’ E-entrepreneurial intentions

PurposeIndia has witnessed a significant surge in internet users in recent years, creating an ideal environment for E-entrepreneurship. With the rise of E-commerce and the growth of the digital economy, there is tremendous potential for online businesses in developing nations. Our study outlines the behavioral, cognitive, and environmental aspects shaping students' E-entrepreneurial intentions (EEI).Design/methodology/approachOur study incorporated structural equation modeling (SEM), social cognitive theory (SCT), and entrepreneurial event model (EEM) to evaluate the EEI of 460 students from India's top five engineering institutes. The direct and indirect linkages in the model were examined by employing mediation and moderation analysis.FindingsOur findings reveal that behavioral, environmental, and cognitive factors facilitate evaluating feasibility, further igniting students' EEI. The cognitive factors and E-entrepreneurial feasibility (EEF) mediate the relationship between the underlying constructs. Furthermore, financial resource availability (FRA) strengthens, and loss aversion bias(LAB) weakens the linkage between EEF and EEM.Research limitations/implicationsThe study's findings may benefit online innovation communities, potential technopreneurs, financial institutions, and policymakers in improving the entrepreneurial ecosystem.Originality/valueThe study integrates psychological and sociological perspectives to understand the key facilitators of EEF and EEI. The study combines SCT and the EEM by appending crucial constructs such as FRA and LAB to broaden the horizons of EEI.

Clustering of behavioral economic biases in decision-making and risk for cigarette smoking and other substance use in women and men

BackgroundLow loss aversion (LA) and high delay discounting (DD) are behavioral-economic decision-making biases that independently predict cigarette smoking and other risky substance use. Here we examine (1) whether low-LA and high-DD co-occur, (2) does co-occurrence increase the odds of current smoking and other substance use compared to only low-LA, high-DD, or neither; and (3) potential gender differences in these associations. MethodData are from five studies with U.S. adults who currently smoked or never-smoked cigarettes recruited using online convenience sampling matching on gender and education. Participants completed identical sociodemographic, substance use (cigarette, other drugs, alcohol), and LA (hypothetical 50–50 gambles) and DD (monetary-choice questionnaire) measures. LA and DD scores were dichotomized as low and high using Receiver-Operating-Characteristic Curve logistic regression. ResultsLA and DD each independently predicted substance use and with few exceptions were not influenced by gender. Low-LA compared to high-LA predicted two-fold greater odds of co-occurring high-DD (AOR = 2.120, 95%CI:1.749–2.571, p < .0001). Similarly, high-DD compared to low DD predicted two-fold greater odds of low-LA (AOR = 2.118, 95%CI:1.747–2.568, p < .0001). Among those with co-occurring low-LA and high-DD, odds of substance use were 5–10 times greater than those exhibiting neither, and 2–3 times greater than those exhibiting only low-LA or high-DD. ConclusionsLow-LA and high-DD cluster in women and men such that exhibiting one of these decision-making biases doubles the odds of exhibiting the other. These results demonstrate reliable clustering of low-LA and high-DD and a striking increase in risk for substance use relative to having only one or neither decision-making bias.

NAVIGATING FINANCIAL DECISIONS: A COMPREHENSIVE REVIEW OF THEORIES, BEHAVIOURS, AND INNOVATIONS

This literature review synthesizes seminal and contemporary research on financial decision-making, emphasizing theoretical frameworks and empirical findings. Fama's (1970) Efficient Market Hypothesis sets the foundation for understanding market behavior, while Kahneman and Tversky's (1979) Prospect Theory introduces psychological influences, highlighting biases such as loss aversion (Tversky &amp; Kahneman, 1991). Jensen and Meckling (1976) provide insights into agency theory, exploring the implications of managerial behavior on firm performance. The influence of gender on investment strategies is examined by Barber and Odean (2001), illustrating the role of overconfidence. Additionally, the impact of social interactions on financial choices is explored by Bursztyn et al. (2014). Financial literacy, addressed by Lusardi and Mitchell (2014), underscores the importance of informed decision-making in personal finance. The review also highlights the integration of behavioral insights in corporate finance, particularly in capital structure decisions (Myers, 1984) and risk management practices (Hull, 2012). Overall, the collected works illustrate a rich tapestry of factors influencing financial decisions, blending economic theory with behavioral insights, and emphasizing the necessity for ongoing research in this dynamic field. KEYWORDS: Financial Decision-Making, Behavioral Finance, Prospect Theory, Market Efficiency, Agency Theory, Overconfidence, Financial Literacy, Risk Management, Capital Structure and Social Interactions.

Bilateral trade with loss-averse agents

AbstractWe introduce expectations-based loss aversion, which can explain the empirically well-documented endowment and attachment effect, into the classical bilateral-trade setting (Myerson and Satterthwaite in J. Econ. Theory 29:265–281, 1983). We derive optimal mechanisms for different objectives and find that relative to no loss aversion, the platform designer optimally provides agents with partial insurance in the ownership dimension and with full insurance in the money dimension. Notably, the former is achieved either by increasing or decreasing the trade frequency, depending on the distribution of types. Finally, we show that the impossibility of inducing materially efficient trade persists with loss aversion.

Exploring the Loss Aversion Scale’s psychometric properties in Spain

Loss aversion is a psychological construct defined as a tendency to value potential losses more than gains in a situation that requires decision-making. The Loss Aversion Scale (LAS, eight items) measures an individual’s loss aversion to various situations. However, the generalization of its psychometric properties to different population groups is unknown. This study aimed to validate the LAS instrument for use among Spanish university adults. To this end, two studies were conducted: a content validity study calculating the substantive validity (N = 24) of the instrument’s translation from original English to Spanish and a study of internal structure and association (N = 766) among Spanish university men and women aged 18–35. The analyses performed for each sample indicated that the instrument had adequate validity and reliability values as a one-dimensional measure; however, items 5 and 8 had to be removed. Their scores indicated moderate-magnitude correlations with social desirability. This article debates the study’s limitations, practical implications, and future lines of research based on the results. The conclusion is that the Loss Aversion Scale instrument suits general Spanish population samples and requires probable methodological control concerning social desirability.