Kahneman and Tversky’s Prospect Concept posit that people have loss aversion. What’s loss aversion?
It implies that people expertise losses extra intensely than good points of the identical magnitude; as an illustration, the psychological impression of dropping a sure sum of money is bigger than the pleasure derived from gaining that very same quantity. A key query is how a lot extra intensely to people expertise good points than losses?
To formalize issues, prospect principle assumes the next utility operate:
Essentially 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 are able to plot the utility operate with this parameterization on the graph under as follows.
One key challenge, nonetheless, 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 quite a lot of disciplines (e.g., economics, psychology, neuroscience) and quite a lot of knowledge varieties. Most research (53%) relied on a lab experiment design, however 26.5% of articles recognized got here from a area experiment of different area knowledge; 42% of the research got here from Europe and 30% got here from North America.
The unadjusted outcomes (proven under) 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 are able to 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 client model selection–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. Briefly, the Brown et al. outcomes are larger than earlier estimates, however decrease than Tversky and Kahneman.
You possibly can learn the complete 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 Concept: 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.
