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On the Descriptive Value of Loss Aversion in Decisions under Risk

Author

Listed:
  • Eyal Ert

    (Harvard Business School)

  • Ido Erev

    (Faculty of Industrial Engineering and Management, Technion - Israel Institute of Technology.)

Abstract
Five studies are presented that explore the assertion that losses loom larger than gains. The first two studies reveal equal sensitivity to gains and losses. For example, half of the participants preferred the gamble "1000 with probability 0.5; -1000 otherwise" over "0 with certainty." Studies 3, 4, and 5 address the apparent discrepancy between these results and the evidence for loss aversion documented in previous research. The results reveal that only under very specific conditions does the pattern predicted by the loss aversion assertion emerge. This pattern does not emerge in short experiments or in the first 10 trials of long experiments. Nor does it emerge in long experiments with two-outcome symmetric gambles, or in long experiments with asymmetric multi-outcome gambles. The observed behavior, in these settings, reflects risk neutrality in choice among low-magnitude mixed gambles.

Suggested Citation

  • Eyal Ert & Ido Erev, 2010. "On the Descriptive Value of Loss Aversion in Decisions under Risk," Harvard Business School Working Papers 10-056, Harvard Business School.
    • Handle: RePEc:hbs:wpaper:10-056
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    File URL: http://www.hbs.edu/research/pdf/10-056.pdf
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    References listed on IDEAS

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    Cited by:

    1. Jonathan Chapman & Erik Snowberg & Stephanie Wang & Colin Camerer, 2018. "Loss Attitudes in the U.S. Population: Evidence from Dynamically Optimized Sequential Experimentation (DOSE)," CESifo Working Paper Series 7262, CESifo.
    2. Santiago I. Sautua, 2016. "Does Uncertainty Cause Inertia In Decision Making? An Experimental Study Of The Role Of Regret Aversion And Indecisiveness," Documentos de Trabajo 14587, Universidad del Rosario.
    3. Mosi Rosenboim & Tal Shavit, 2012. "Whose money is it anyway? Using prepaid incentives in experimental economics to create a natural environment," Experimental Economics, Springer;Economic Science Association, vol. 15(1), pages 145-157, March.
    4. Luís Santos-Pinto & Adrian Bruhin & José Mata & Thomas Åstebro, 2015. "Detecting heterogeneous risk attitudes with mixed gambles," Theory and Decision, Springer, vol. 79(4), pages 573-600, December.
    5. Michał Krawczyk, 2012. "To answer or not to answer? A field test of loss aversion," Ekonomia journal, Faculty of Economic Sciences, University of Warsaw, vol. 29.
    6. Michal Krawczyk, 2011. "To answer or not to answer? A field test of loss aversion," Framed Field Experiments 00695, The Field Experiments Website.

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    More about this item

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles

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