Talk:Loss aversion

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Can loss aversion ever be rational?

I dispute the arguments in this entire section. Loss aversion research compares differences in consumer behavior faced with "the same change in price framed differently."

"5% less on $1000" and "not 5% more on $1000" are not the same change in price. The same change in price would be: "$50 less on $1000" vs "not $50 more on $950." The percentage is indeed different -- but that is not a rational reason to prefer one to the other. The idea is that given that there is no difference in the choice, prefering one over the other is irrational, and why do humans make such irrational decisions? In the 950/1000 vs 1000/1050 example, there is a difference.

--Quarl 05:00, August 21, 2005 (UTC)

losses This section is rather naive. The idea that people are more averse to losing a given amount than gaining the same amount is absolutely standard in economics, where

it is known as "risk aversion". Utility linear in money is a special case, used

only for simplicity. "Loss aversion" as irrational behavior is something different.

--- Loss aversion can't be explained strictly by the utility function of the expected utility theory. Experiments on monkeys have made a strong case for loss aversion as being a real cognitive bias. See Chen, Keith (2006), "How Basic are Behavioral Biases? Evidence from Capuchin Monkey Trading Behavior". (forthcoming: Journal of Political Economy). Moreover, no reference is made to the endowment effet, a direct consequence of loss aversion, although there exists a strong evidence of it.

Here, it's the author who shows a bias... Just take a look at the references. Maxcanada May 31, 2006

"The classic definition of rationality depends on the assumption -$1 causes a loss of satisfaction equal to the satisfaction gained by +$1"

I'm not quite sure what the 'classic definition of rationality' is so if I'm wrong here at least a reference should be given. The definition of 'rational preferences', however, depends on transitivity (preferences being consistent) and completeness (all alternatives can be ranked). The formal definition can be found in any advanced microeconomics textbook (such as 'Microeconomic Theory ' by Mas-Collel et al.). I don't have one here but it's something like:

A preference relation, p, is complete if for all x and x' in X, either (x p x') or (x' p x), where X is the set on which p is defined, e.g. the set of possible consumption bundles, and (y p y') means that y is weakly preferred to y'. The preference relation, p, is said to be transitive if for all x, x' and x in X, (x p x') and (x' p x) implies (x p x).

This doesn't mean that -$1 causes a utility loss equal to the gain utility gain of $1. Actually, that seems more to describe linear preferences over wealth or, equivalently, risk neutrality (which is something quite different). —Preceding unsigned comment added by Willi5willi5 (talk • contribs) 23:04, 26 February 2008 (UTC)[reply]

This section *Can loss aversion ever be rational?* is in an inappropriate position in the article. Doubts about loss aversion or attempts to explain it away using standard economic theory should be placed at the end. An adequate description of prospect theory itself should be placed at the beginning. As things stand currently this section is essentially partisan-hack vandalism.

Irony

The author has a bias, in his description of a bias we have regarding of loss averions? Mathiastck 00:35, 15 August 2006 (UTC)[reply]

In English, please? 84.44.171.253 12:12, 7 November 2006 (UTC)[reply]

psychology

The $1,000 dollar sucharge vs discount example is technically not the same. For the sake of economic analysis "$50 less on $1,000" and "not $50 more on $950" would have to be used. Still, it is doubtful that individuals will undergo such deep thinking when comparing the options. Psychology plays a major role in this issue and the field Behavioral Finance is investigating such effects. I do agree that the topic "Loss aversion" is somewhat misleading. CWRasz 18:09, 2 September 2006 (UTC)[reply]

Social Psychology Rationale

Loss aversion is a concept of Social Psychology more than economics. It is not the reality of loss that matters but the perception. This is one place where being good at math doesn't give the answer. Nations have gone to war and "stayed the course" until their doom because of loss aversion. It simply means you refuse to admit you made a mistake. Social Psychology Fourth Edition, Aronson et al , p. 175 "Once we have committed a lot of time or energy to a cause, it is nearly impossible to convince us that it is unworthy" The real question is "How bad do your losses have to be before you surrender?" In the stock market this is called capitulation, I think. Outofthebox 04:00, 14 July 2007 (UTC)[reply]

different example

Wouldn't it be easier for understanding to use a different example, because a 5% discount off 1000$ ($50) is not the same as a 5 % surcharge of 950$ (which is 47.50$).

Suggested Example: Would you rather have a movie ticket priced at regular 10 $, if you go Monday-Wednesday you get 2.50$ off, or a movie ticket priced at 7.50$ Where you'd have to pay a surcharge of 2.50 $ on Thursdays-Sundays. If you go on a Friday night, you'd pay in both cases the same amount of money (10$) but which would you prefer?

Because of loss aversions a majority of customers would prefer the 10$ regular price (and get 2.50$ off Monday to Wednesday) than "losing" the 2.50$ surcharge on 7.50 $ on Weekends. —The preceding unsigned comment was added by Soylentyellow (talk • contribs) .

An Alternative Example

this section is just copied and pasted from Framing_(economics) Elie 00:46, 25 January 2007 (UTC)[reply]

This example is flawed anyway. Program D claims that a 33% chance that all 600 people will live means there is a 66% chance that everyone will die. Really it's a 66% chance that between 1 and 600 people will die, i.e. a 33% chance that everyone lives, a 66% chance that not everyone lives. LeeWilson 07:14, 5 February 2007 (UTC)[reply]

Can we get rid of the Weasel Words tag? This is not an attempt to influence the reader, rather an attempt to illustrate a scenario to the reader, with one comment on actual human behavior which was referenced. Wnross7 16:13, 22 August 2007 (UTC)[reply]

Surcharge/Discount

The whole discount example needs to go. Loss aversion refers to losing something I already consider mine. A surcharge/discount both apply to something that I don't have yet. I am not sure the endowment effect applies to something different. I'm recalling MBA classes from 5 years ago, so I don't have any thing to cite at the moment. I added the paragraph in the header about $100 Dw31415 20:07, 24 August 2007 (UTC)[reply]

Philosophy?

Why is this article within the scope of the WikiProject Philosophy? The subject matter is economics or psychology. —Preceding unsigned comment added by 70.171.229.196 (talk) 04:10, 6 November 2007 (UTC)[reply]