Loss Aversion Behavior Research Articles

Design Three Trading Strategies Based on Overconfidence, Loss Aversion, and Herd Behaviour

<p>There is a basic assumption in the field of economics, which is people are rational. It might be taught in the first class of the principle of economics. However, this assumption could hardly be applied to the real world since people can be affected easily sometimes, especially when they cope with their assets. Thus, with combination of psychology and academic finance, behavioural finance aims to understand the effects influencing investors’ decision-making. This paper will discuss some effects which can be commonly seen in the real world, overconfidence, loss aversion, and herd behaviour included.</p>

Design of coordination contract for quality control-based supply chain under consumer balking behavior with fuzzy environment

Considering the ubiquity of consumer balking behavior (CBB) in real-life economics and the importance of product quality control (QC) to supply chain (SC) competitiveness, this paper explores the SC coordination under both the QC and the CBB. Specifically, the consumer’s loss aversion behavior was illustrated at a fixed balking probability, and the SC models were created for centralized and decentralized decision-making modes. After that, the optimal strategies for the retailer and the manufacturer were identified, and the comparative static analysis was adopted to explore the effects of the CBB and QC on the optimal decision-making of the SC. The research results show that the QC-based SC under the CBB cannot be coordinated by wholesale price contract alone, but can be coordinated perfectly by this contract when the retailer shares the quality effort and the manufacturer shares the oversupply cost and analyzed through the fuzzy environment with the formulation. This finding sheds new light on the theory and application of wholesale price contract in SC coordination. Finally, the parameter sensitivity analysis was performed on balking probability and product qualification rate (PQR) through numerical experiments, which further discloses the impacts of the CBB and product QC on the optimal decision-making and profit of the SC.

Grit, Loss Aversion, and Investor Behavior

We examine whether grit affects individuals' preferences and trading decisions. Grit is the sustained effort toward a goal despite setbacks. It is malleable and distinct from the Big Five personality traits. Using experiments formalized in prospect theory, we find that grit reduces loss aversion. By diminishing loss aversion, gritty investors exhibit a lower disposition effect since they are more willing to exit losing investments. Consequently, they accumulate about 7% more wealth relative to control participants. Overall, grit affects the quality of investment decisions. Ultimately, our results suggest that interventions cultivating grit could improve households' financial outcomes.

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.

Selecting green third party logistics providers for a loss-averse fourth party logistics provider in a multiattribute reverse auction

Existing winner determination models tend to overlook the sustainable attributes of third party logistics (3PL) providers. This paper investigates a novel green winner determination problem that has several features, including (i) the sustainable attributes with conflicting and interactive properties of potential 3PLs, and (ii) the loss-averse behavior with an internal reference point of a fourth party logistics (4PL) provider. For the attributes with a combination of crisp data, interval numbers and intuitionistic 2-tuple linguistic terms, we integrate the prospect theory (PT) and Choquet integral with the “benefits, opportunities, costs and risks (BOCR)” framework to propose a novel PTC-BOCR solution method. Numerical experiments are conducted to illustrate the effectiveness and applicability of PTC-BOCR by comparing it with some known methods. Comparison analysis indicates that PTC-BOCR is robust with respect to the variance of 3PLs’ attribute values, while behavioral parameter analysis reveals that the loss-averse behavior of the 4PL is intensified as the difference of 3PLs varies. Managerial insights are also drawn for green 3PLs to win the auction. This study is a significant extension of traditional decision-making methods, which could benefit the realization of a sustainable logistics system in a cost-effective way for 4PLs.

Double hierarchy hesitant fuzzy linguistic entropy-based TODIM approach using evidential theory

Double hierarchy hesitant fuzzy linguistic term sets (DHHFLTSs) can describe hesitation more accurately and reasonably than other linguistic representation models by adding a second hierarchy hesitant fuzzy linguistic term set. The Dempster–Shafer evidence theory (DSET) can minimize the loss of evaluation information in denoting and fusing uncertain information, and TODIM (an acronym in Portuguese for interactive and multi-criteria decision making) can consider the loss aversion behavior of decision makers (DMs). Considering their unique advantages, in this study, we propose a novel multiple criteria group decision-making method based on DSET and TODIM under the DHHFLTSs. First, we improve the cumulative functions and distance measure of DHHFLTSs. Next, we apply DSET to fuse double hierarchy hesitant fuzzy linguistic (DHHFL) information provided by a group of experts and obtain an evidence matrix consisting of belief degrees and DHHFLTSs. Then, we use the TODIM method to address the evidence matrix based on improved cumulative functions and distance measures to obtain the final ranking results. Finally, a weight determination model is constructed based on information entropy in the scenario of completely unknown weights. The newly proposed method reduces the loss of evaluation information and also considers the loss aversion behavior of DMs. Furthermore, an application example of a postgraduate course evaluation is used to demonstrate the effectiveness and rationality of the proposed method. Additionally, we compare the proposed method with other existing methods to further demonstrate the advantages of the proposed method.

Risk-Aware Data Offloading in Multi-Server Multi-Access Edge Computing Environment

Multi-access Edge Computing (MEC) has emerged as a flexible and cost-effective paradigm, enabling resource constrained mobile devices to offload, either partially or completely, computationally intensive tasks to a set of servers at the edge of the network. Given that the shared nature of the servers' resources introduces high computation and communication uncertainty, in this paper we consider users' risk-seeking or loss-aversion behavior in their final decisions regarding the portion of their computing tasks to be offloaded at each server in a multi-MEC server environment, while executing the rest locally. This is achieved by capitalizing on the power and principles of Prospect Theory and Tragedy of the Commons, treating each MEC server as a Common Pool of Resources available to all the users, while being rivarlous and subtractable, thus may potentially fail if over-exploited by the users. The goal of each user becomes to maximize its perceived satisfaction, as expressed through a properly formulated prospect-theoretic utility function, by offloading portion of its computing tasks to the different MEC servers. To address this problem and conclude to the optimal allocation strategy, a non-cooperative game among the users is formulated and the corresponding Pure Nash Equilibrium (PNE), i.e., optimal data offloading, is determined, while a distributed low-complexity algorithm that converges to the PNE is introduced. The performance and key principles of the proposed framework are demonstrated through modeling and simulation, while useful insights about the users' data offloading decisions under realistic conditions and behaviors are presented.

Data Offloading in UAV-Assisted Multi-Access Edge Computing Systems: A Resource-Based Pricing and User Risk-Awareness Approach.

Unmanned Aerial Vehicle (UAV)-assisted Multi-access Edge Computing (MEC) systems have emerged recently as a flexible and dynamic computing environment, providing task offloading service to the users. In order for such a paradigm to be viable, the operator of a UAV-mounted MEC server should enjoy some form of profit by offering its computing capabilities to the end users. To deal with this issue in this paper, we apply a usage-based pricing policy for allowing the exploitation of the servers’ computing resources. The proposed pricing mechanism implicitly introduces a more social behavior to the users with respect to competing for the UAV-mounted MEC servers’ computation resources. In order to properly model the users’ risk-aware behavior within the overall data offloading decision-making process the principles of Prospect Theory are adopted, while the exploitation of the available computation resources is considered based on the theory of the Tragedy of the Commons. Initially, the user’s prospect-theoretic utility function is formulated by quantifying the user’s risk seeking and loss aversion behavior, while taking into account the pricing mechanism. Accordingly, the users’ pricing and risk-aware data offloading problem is formulated as a distributed maximization problem of each user’s expected prospect-theoretic utility function and addressed as a non-cooperative game among the users. The existence of a Pure Nash Equilibrium (PNE) for the formulated non-cooperative game is shown based on the theory of submodular games. An iterative and distributed algorithm is introduced which converges to the PNE, following the learning rule of the best response dynamics. The performance evaluation of the proposed approach is achieved via modeling and simulation, and detailed numerical results are presented highlighting its key operation features and benefits.

Cognitive Data Offloading in Mobile Edge Computing for Internet of Things

Data offloading to Mobile Edge Computing (MEC) servers is an attractive choice for resource-constrained Internet of Things (IoT) devices, towards reducing their computational effort. In this paper, we investigate the potential of partial data offloading to MEC servers, under the perspective of users’ cognitive IoT devices presenting loss averse and gain seeking behavior. Due to the sharing nature of the access environment and the MEC server’s computational characteristics, we treat the MEC server option as a common pool of resources with uncertain payoff returned to the users, while the local computation capability is treated as a safe option for each user. Following the properties of Prospect Theory, users’ prospect-theoretic utilities are formulated exploiting the local computing and offloading overhead options under probabilistic uncertainty. Such a modeling allows for the infusion of human awareness, inherent cognitive biases and behavioral characteristics into the devices’ operation, their data offloading decisions and the edge computing environment that the devices are interacting with. Accordingly, each user’s optimal offloaded data to the MEC server is obtained as the outcome of a non-cooperative game, with users attempting to maximize their own utilities. The existence and uniqueness of a Pure Nash Equilibrium (PNE) are proven under the probabilistic nature of the respective payoff functions, while a distributed algorithm that convergences to the PNE is designed. Numerical results are provided that demonstrate the operation and superiority of the proposed framework under different IoT scenarios and behaviors, considering both homogeneous and heterogeneous users.

Linking Risk Management Under Expected Shortfall to Loss-Averse Behavior

We introduce and solve an optimal asset allocation problem under a weighted expected shortfall (WES) constraint, which contains the risk management problem under an expected shortfall constraint of Basak and Shapiro (2001) as a special case. Furthermore, we link our risk management problem under the WES constraint with an optimal asset allocation with a multiple-reference-based preference (MRBP) and find that the optimal wealth with MRBP owns the same form as the optimal solution under the WES constraint. For the degenerate case with a fixed reference level, we are able to determine the critical maximal allowed expected shortfall constraint as a function of the loss aversion parameters to achieve equivalence. It is interesting to observe that, while no equivalence can be in general obtained between the WES and the MRBP solution, the optimal terminal wealth of the WES can be made to coincide with the MRBP terminal wealth in the most favorable and in the worst market states. In addition, we carry out a general equilibrium analysis in the presence of a WES/MRBP risk manager.

Managing morning commute congestion with a tradable credit scheme under commuter heterogeneity and market loss aversion behavior

This study investigates the impact of a tradable credit scheme (TCS) on managing morning commute congestion by considering commuters’ value-of-time and schedule delay heterogeneities, and loss aversion behavior in purchasing credits. It illustrates that total value of traded credits and credit price approach zero as commuters’ loss sensitivity increases. Further, the initial credit allocation method can impact the credit price and commuters’ departure rate. The study insights show that if commuters’ loss sensitivity is not considered, the system-optimal TCS design can lead to a less effective scheme to minimize the total system travel cost.

How Is the Distrust Trap Pervasive in East Asia?: Focusing on Incomplete Sovereignty with a Prospect Theory

This paper investigates Japan’s two foreign policies toward South Korea and the People’s Republic of China after the 2000s based on prospect theory. The Japanese government intended those decisions as loss-averse behavior to overcome incomplete sovereignty by resolving the comfort women issue and the Senkaku/Diaoyu Islands’ territorial dispute. However, the distrust trap made South Korea and China recognize Japan’s intention as risk-acceptant. This paper posits that a distrust trap plays a significant role as a heuristic that makes South Korea and China reluctant to cooperate with Japan. The distrust trap indicates the extension of a cognitive gap between states when the challenging behavior of one state provokes distrust of others and gives a signal of threat regardless of its intention or approach. The twenty-first century is a remarkable period because security issues toward Japan are making gradual progress of cooperation of East Asia superficial. It relates to the problem of trust-building. This paper uses transnational survey data to show the distrust trap between South Korea, China, and Japan.

Winner determination of loss-averse buyers with incomplete information in multiattribute reverse auctions for clean energy device procurement

Clean energy is an important source to mitigate the pressure of resources shortage and environmental effects. While multiattribute reverse auction is frequently adopted for the procurement efficiency of clean energy devices, the associated winner determination problem is explicitly studied for a utility company/buyer to select the most appropriate supplier in the clean energy market. Considering the buyer's loss-averse behavior with incomplete information and suppliers' conflicting attributes in different types evaluated by multiple experts, we incorporate an IULOWAf (induced uncertain linguistic ordered weighted averaging) operator and a revised TODIM (an acronym in Portuguese of Interactive and Multi-attribute Decision Making) measure that is consistent with prospect theory into the “benefits, opportunities, costs and risks” (BOCR) framework to develop a novel BOCR-uRTODIM solution method for multi-attribute decision making. Numerical experiments illustrate the effectiveness and robustness of the proposed method by comparing it with some known methods. An interesting result indicates that the risk aversion degree of the buyer increases as the variance of suppliers' attributes expands. The BOCR-uRTODIM could be a useful tool for utility companies to avoid losses and for associated suppliers to improve their attributes for a win in the clean energy industry.

Risk premiums and certainty equivalents of loss-averse newsvendors of bounded utility

Loss-averse behavior makes the newsvendors avoid the losses more than seeking the probable gains as the losses have more psychological impact on the newsvendor than the gains. In economics and decision theory, the classical newsvendor models treat losses and gains equally likely, by disregarding the expected utility when the newsvendor is loss-averse. Moreover, the use of unbounded utility to model risk attitudes fails to explain some decision-making paradoxes. In contrast, this paper deals with the utility maximization of the newsvendor using a class of bounded utility functions to study the effect of loss aversion on the newsvendor certainty equivalents and risk premiums. New formulas are introduced to find the utility-optimal order quantity of the normal distribution. The results show that when an exponential loss aversion exists, the classical newsvendor optimal quantity serves as a lower bound when the overage costs are high and as an upper bound when the underage costs are high. In addition, we show that high loss aversion entails higher risk premiums. Similar conclusion holds when the overage/underage costs increase. Higher standard deviations, on the other hand, mean lower utility-optimal quantities and higher risk premiums. The presented formulas are advantageous in finding the optimal order quantities and risk premiums of a stochastic short-shelf life inventory when the loss is a key factor in the decision-making process.

Multiperiod Asset Allocation Considering Dynamic Loss Aversion Behavior of Investors

In order to study the effect of loss aversion behavior on multiperiod investment decisions, we first introduce some psychological characteristics of dynamic loss aversion and then construct a multiperiod portfolio model by considering a conditional value-at-risk (CVaR) constraint. We then design a variable neighborhood search-based hybrid genetic algorithm to solve the model. We finally study the optimal asset allocation and investment performance of the proposed multiperiod model. Some important metrics, such as the initial loss aversion coefficient and reference point, are used to test the robustness of the model. The result shows that investors with loss aversion tend to centralize most of their wealth and have a better performance than rational investors. The effects of CVaR on investment performance are given. When a market is falling, investors with a higher degree of risk aversion can avoid a large loss and can obtain higher gains.

The Role of Chonsei as a Price Protector in the Korean Housing Market

ABSTRACTIn this study, we investigate whether ‘Chonsei,’ the distinctive type of housing contract system in Korea, has a favorable impact on house prices during a market downturn. We show the mechanism in which Chonsei prevents a sharp drop in house prices based on sellers’ loss aversion behavior. Moreover, using data on the Seoul condominium (i.e. apartment) market during the 2006–2017 period, we find that Chonsei prices have a negative impact on the housing trade volume in a market recession. This finding is consistent with our argument that loss aversion behavior appears with regard to the rise in Chonsei prices and thereby Chonsei functions as a price protector in the Korean housing market.

An equilibrium model of the supply chain network under multi-attribute behaviors analysis

This paper studies a supply chain network (SCN) equilibrium model considering decision makers’ multi-attribute behaviors from the perspective of behavioral finance. In this paper, an equilibrium model of an uncertain SNC is constructed, in which retailers choose their decisions according to their risk-averse behavior, loss-averse behavior, and regret-averse behavior. By using different weights to represent retailers’ attitudes to these three behaviors, the retailers’ multi-attribute utility functions are developed. The equilibrium conditions of the manufacturers, the retailers, together with the network are established by the finite-dimensional variational inequality formulation. Three numerical examples are solved. In the first numerical example, we illustrate the effect of each of these three behaviors on the equilibrium decisions, the profits, and the utilities of the decision makers. In the other two numerical examples, we explore the effects of changes in attitudes to these three behaviors on the equilibrium decisions, profits, and utilities of the decision makers. The numerical results show that the equilibrium decisions are affected by each of these three behaviors very much. Moreover, they are sensitive to the changes in attitudes to these behaviors.

Mechanism design of incentive-based reverse auctions with loss-averse 3PLs under incomplete attributes.

As a supply chain solution integrator, fourth party logistics (4PL) has become an important focus for improving the operational efficiency of the logistics industry in recent days. This paper addresses the mechanism design problem of the 4PL for selecting a third party logistics (3PL) provider who involves loss-averse behavior to form a longer-term strategic partnership in multi-attribute reverse auctions. Due to fluctuating costs of energy or labor and unintentional delivery failures like traffic jam or technology malfunctions, we consider two incomplete attributes, namely cost uncertainty and delivery risk. Integrating the loss-averse behavior of 3PLs, based on the prospect theory, the bid decision model is constructed to obtain 3PLs’ bidding strategies. The corresponding efficient and optimal scoring auctions that consist of cost-sharing contract and contingent penalty are developed to maximize the ex ante expected profit of the system or the 4PL depending on whether the 4PL is willing to cooperate or not. Theoretical analysis verified by numerical examples illustrates the advantage of the proposed mechanisms. Impacts of model parameters on the 4PL’s decision are also investigated and managerial insights are presented.

Coordination of VMI supply chain with a loss-averse manufacturer under quality-dependency and marketing-dependency

This paper addresses a vendor-managed inventory (VMI) supply chain with a loss-averse manufacturer and a risk-neutral retailer. Market demand faced by the retailer is stochastic and dependent on product quality level and marketing effort level. We propose a combined contract composed of option and cost-sharing to investigate coordination and profit allocation issues of the supply chain. To model loss aversion of the manufacturer, we employ multiple mental accounts and apply the utility function to upside and downside potentials of manufacturer's production decision separately. We derive the optimal strategy for each member with a Stackelberg game in which the retailer acts as the leader. It is proved that both coordination of the supply chain and Pareto-improvement can be achieved synchronously by the combined contract. In the premise of coordination, the system-wide profit can be allocated arbitrarily only by option price. Through negotiation, the retailer and the manufacturer just need to confirm an appropriate option price to obtain that neither of them becomes worse off. We also find that the manufacturer's loss aversion is a significant element for contract design and profit allocation, and the manufacturer could benefit from its own loss aversion behavior under certain condition.

Entrepreneurial Orientation in Dire Times: The Role of Risk-Taking Ability of Owners

The goal of this paper is to investigate the impact of loss-aversion on firm-level risk- taking. Using a behavioral agency theory perspective, we argue that loss-aversion leads managers to adopt risk-oriented strategic postures such as EO, contingent on the risk-taking ability of the owners. A panel dataset of 48,688 observations belonging to 13,333 firms over a period of 11 years, provides supporting evidence that higher performance aspiration gap leads to higher entrepreneurial orientation among firms, and given this loss-aversion behavior, the risk-taking ability of firms is contingent on ownership, due to differences in the resource configuration and governance arrangements.