Kahneman and Tversky’s Prospect Principle posit that people have loss aversion. What’s loss aversion?
It signifies that people expertise losses extra intensely than positive factors of the identical magnitude; for example, the psychological influence of shedding a sure amount of cash is bigger than the pleasure derived from gaining that very same quantity. A key query is how a lot extra intensely to people expertise positive factors than losses?
To formalize issues, prospect principle assumes the next utility perform:
Probably the most broadly cited estimates are for these parameters are from Tversky and Kahneman (1992). In that paper they discover that loss aversion λ=2.25, and α=β=0.88. We will plot the utility perform with this parameterization on the graph beneath as follows.
One key problem, nevertheless, is that the Tversky and Kahneman (1992) loss aversion estimates got here from a single examine of 25 graduate college students from an elite American college. How generalizable are these outcomes? Is there a greater estimate of loss aversion on the market?
A paper Brown et al. (2024) goals to reply this query by conducting a meta-analysis of loss aversion estimates from all research revealed between 1992 and 2017. They discovered 607 empirical estimates of loss aversion throughout 150 articles. The research got here from a wide range of disciplines (e.g., economics, psychology, neuroscience) and a wide range of information sorts. Most research (53%) relied on a lab experiment design, however 26.5% of articles recognized got here from a subject experiment of different subject information; 42% of the research got here from Europe and 30% got here from North America.
The unadjusted outcomes (proven beneath) estimated a median loss aversion of 1.69 and imply loss aversion of 1.97. After making use of a random results meta-analytic distribution, the imply loss aversion coefficient was discovered to be 1.955 with a 95% chance that the true worth falls between 1.820 and a pair of.102.
These outcomes are considerably decrease, however not disimilar to the Tversky and Kahneman (1992) estimate of two.25. We will additionally examine the outcomes to 2 earlier meta-analysis research of loss aversion. Neumann and Böckenholt 2014–which examined los aversion utilizing 33 research about shopper model alternative–reported a base mannequin estimate of λ = 1.49 and an “enhanced mannequin” estimate of λ = 1.73; Walasek, Mullett, and Stewart (2018)–which examined 17 research of gain-loss monetary lotteries–estimated that λ = 1.31. In brief, the Brown et al. outcomes are greater than earlier estimates, however decrease than Tversky and Kahneman.
You may learn the total paper right here.
Key References
- Brown, Alexander L., Taisuke Imai, Ferdinand M. Vieider, and Colin F. Camerer. “Meta-analysis of empirical estimates of loss aversion.” Journal of Financial Literature 62, no. 2 (2024): 485-516.
- Neumann, Nico, and Ulf Böckenholt. 2014. “A Meta-Evaluation of Loss Aversion in Product Alternative.” Journal of Retailing 90 (2): 182–97.
- Tversky, Amos, and Daniel Kahneman. 1992. “Advances in Prospect Principle: Cumulative Illustration of Uncertainty.” Journal of Danger and Uncertainty 5 (4): 297–323.
- Walasek, Lukasz, Timothy L. Mullett, and Neil Stewart. 2018. “A Meta-Evaluation of Loss Aversion in Dangerous Contexts.” http://dx.doi.org/10.2139/ssrn.3189088.
