Talk:Loss aversion

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Can loss aversion ever be rational?[edit]

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)

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. — Preceding unsigned comment added by Erasmuse (talkcontribs) 14:15, 7 March 2006‎

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

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 and doesn't even belong at the end of the article. I am deleting it and this is the reason why: This section takes a facile objection to loss aversion that has been rebutted in the literature and it betrays a fundamental misunderstanding of the framing effect. Loss aversion is a psychological phenomenon, not an economic phenomenon. The economic prospect must remain unchanged, it is the psychological framing that matters. You can have an absolute wealth level of $1000, but if your psychological reference point is $1500 a potential gain of $500 will be more appealing than if your psychological reference point is $1000, in each case the potential gain is 50% of your current wealth of $1000.—Preceding unsigned comment added by 160.94.235.190 (talk) 16:06, 7 April 2008 (UTC)

Irony[edit]

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

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

Psychology[edit]

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)

Different example[edit]

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. — Preceding unsigned comment added by Soylentyellow (talkcontribs) 17:44, 21 September 2006‎

An alternative example[edit]

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

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)
The "lives saved//lost" example has nothing to do with loss aversion, which refers to the observation that "losses loom larger than gains" (Kahneman and Tversky, 1979). The example is a standard illustration of the framing effect, where different attitudes to risk are found depending on whether the outcome is framed as a gain or as a loss. —Preceding unsigned comment added by Kahneman (talkcontribs) 01:40, 15 April 2010 (UTC)
Hi, I agree w/ kahneman (that's not really him, is it?) I'm a grad student at UChicago and had an undergrad insist the asian disease problem is loss aversion because of this page. Sorry buddy. the alternative example is about risk preferences, not loss aversion. —Preceding unsigned comment added by 68.51.73.166 (talk) 14:22, 23 July 2010 (UTC)

Social psychology rationale[edit]

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)

Remove weasel tag[edit]

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)

Definition[edit]

"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 (talkcontribs) 23:04, 26 February 2008 (UTC)

Surcharge/discount[edit]

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)

Don't know what this refers to but this is wrong, too. Loss aversion applies to all reference points, status quo or non-status-quo. expectations and prevailing norms can be reference points, and losses from those non-status-quo reference points loom larger than gains from same. you're confusing a few things here. again, though, don't know what the original example was. (the UChicago grad student as above) —Preceding unsigned comment added by 128.135.207.78 (talk) 02:33, 25 July 2010 (UTC)

Philosophy?[edit]

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)

Remove or change the "neutrality" tag[edit]

Why is this article tagged as being of disputed neutrality? Neutrality doesn't come into this. Call the theory of Loss Aversion "controversial" or "not proven" (though IMO the findings are conclusive) or, better yet, state the contrarian arguments, but this is not about "taking sides". -The Gnome (talk) 10:02, 12 April 2008 (UTC)

Definition of terms[edit]

Some of the terms in this article need additional definition, either here or in another article. Specifically, "induced-value market" and "consumption goods market" should be explained in order to make the article more accessible to the lay person.74.39.223.193 (talk) 15:43, 7 October 2010 (UTC)

"The first two alternative explanations—that under-trading was due to transaction costs or misunderstanding—were tested by comparing goods markets to induced-value markets under the same rules."
I agree, I have found nothing on the internet that can explain an "induced-value market," and therefore the succeeding example is unclear. —Preceding unsigned comment added by 69.232.42.44 (talk) 09:31, 26 November 2010 (UTC)

Proposal to add a section that discusses policy applying loss aversion within our educational system.[edit]

Loss aversion has recently been tested by notable scholars and more recently by Dr. Roland Fryer and has shown positive behavior change of educators within the educational system. I would like to add a section showing other applications of loss aversion within this setting. I have been studying within the field of education and administration for the last 10 years and I hold a doctorate in Educational leadership and Administration from an accredited university in the U.S. I do not plan to add any independent research within this topic and will present my additions in a neutral and verifiable manner. Please let me know if there are any comments, suggestions, or objections to my intended addition. Fmerenda 19:54, 11 December 2012 (UTC) — Preceding unsigned comment added by Fmerenda (talkcontribs)


In the absence of any objections I will begin to add a section regarding the above research utilizing loss aversion from behavioral economics to illustrate a policy that relies upon a specifically framed merit pay intervention.Fmerenda 05:39, 12 December 2012 (UTC) — Preceding unsigned comment added by Fmerenda (talkcontribs)

What if some people are different?[edit]

Just from reading I notice there is a strong tendency to universalize findings even when there is also a strong tendency to only do studies in Western societies. Could there be exceptions to this bias? Is there a minority of people biased in the opposite direction? Knowing how complex the human mind is isn't it more likely that there is at least a tiny number of people who are the other way?75.133.90.126 (talk) 00:51, 13 June 2013 (UTC)

Dr. Karle's comment on this article[edit]

Dr. Karle has reviewed this Wikipedia page, and provided us with the following comments to improve its quality:


In my opinion, references 4 to 7 are rather poor concerning their methodological content. In addition, I think that the statement that "loss aversion is so important to the fields of marketing and behavioral finance" is incomplete in the sense that it neglects Experimental Economics and modern Behavioral Economics (including theory). This statement may therefore be misleading.

A new wave of Economic research on loss aversion includes the concept of expectation-based loss aversion of Koszegi and Rabin (2006, 2007): Recent experimental work from the laboratory and in the field provides a large body of evidence that concludes that economic outcomes are well explained by the concept of expectation-based loss aversion of Koszegi and Rabin (2006, 2007). These works consist of exchange and valuation experiments (see Ericson and Fuster, 2011), consumption–choice experiments with sandwiches (see Karle et al., 2015), experiments in which participants are compensated for exerting effort in a tedious and repetitive task (see Abeler et al., 2011), and of sequential–move tournaments (see Gill and Prowse, 2012). There is also evidence that expectation-based reference dependence affects golf players’ performance (see Pope and Schweitzer, 2011) and cabdrivers’ labour supply decisions (see Crawford and Meng, 2011). Other evidence can be found in Smith (2012) and Heffetz and List (2014).

References:

Abeler, Johannes, Armin Falk, Lorenz Goette, and David Huffman, “Reference Points and Effort Provision,” American Economic Review, 2011, 101 (2), 470–492.

Crawford, Vincent P. and JuanjuanMeng, “New York City Cabdrivers’ Labor Supply Revisited: Reference-Dependent Preferences with Rational-Expectations Targets for Hours and Income,” American Economic Review, 2011, 101 (5), 1912–32.

Ericson, Keith M.Marzilli and Andreas Fuster, “Expectations as Endowments: Evidence on Reference-Dependent Preferences from Exchange and Valuation Experiments,” Quarterly Journal of Economics, 2011, 126 (4), 1879–1907.

Gill, David and Victoria Prowse (2012). "A structural analysis of disappointment aversion in a real effort competition". American Economic Review 102 (1): 469–503.

Heffetz, Ori and John A. List, “Is the Endowment Effect an Expectations Effect?,” Journal of the European Economic Association, 2014, 12 (5), 1396–1422.

Karle, Heiko, Georg Kirchsteiger, and Martin Peitz, “Loss Aversion and Consumption Choice: Theory and Experimental Evidence,” American Economic Journal: Microeconomics, 2015, 7 (2), 101–120.

K˝oszegi, Botond and Matthew Rabin, “A Model of Reference-Dependent Preferences,” Quarterly Journal of Economics, 2006, 121 (4), 1133–1165.

K˝oszegi, Botond and Matthew Rabin, , “Reference-Dependent Risk Attitudes,” American Economic Review, September 2007, 97 (4), 1047–1073.

Pope, Devin G. and Maurice E. Schweitzer, “Is TigerWoods Loss Averse? Persistent Bias in the Face of Experience, Competition, and High Stakes,” American Economic Review, 2011, 101, 129–157.

Smith, Alec, “Lagged Beliefs and Reference–Dependent Utility,” Working Paper, Caltech, 2012.


We hope Wikipedians on this talk page can take advantage of these comments and improve the quality of the article accordingly.

Dr. Karle has published scholarly research which seems to be relevant to this Wikipedia article:


  • Reference : Karle, Heiko & Kirchsteiger, Georg & Peitz, Martin, 2012. "Loss Aversion and Consumption Choice: Theory and Experimental Evidence," CEPR Discussion Papers 9183, C.E.P.R. Discussion Papers.

ExpertIdeasBot (talk) 19:41, 4 December 2015 (UTC)

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Dr. Matthews's comment on this article[edit]

Dr. Matthews has reviewed this Wikipedia page, and provided us with the following comments to improve its quality:


Spelling and grammar mistakes.


We hope Wikipedians on this talk page can take advantage of these comments and improve the quality of the article accordingly.

We believe Dr. Matthews has expertise on the topic of this article, since he has published relevant scholarly research:


  • Reference 1: Carpenter, Jeffrey P. & Matthews, Peter Hans & Schirm, John, 2007. "Tournaments and Office Politics: Evidence from a Real Effort Experiment," IZA Discussion Papers 2972, Institute for the Study of Labor (IZA).
  • Reference 2: Mellizo, Philip & Carpenter, Jeffrey P. & Matthews, Peter Hans, 2011. "Workplace Democracy in the Lab," IZA Discussion Papers 5460, Institute for the Study of Labor (IZA).

ExpertIdeasBot (talk) 18:09, 26 July 2016 (UTC)

Dr. Wengstrom's comment on this article[edit]

Dr. Wengstrom has reviewed this Wikipedia page, and provided us with the following comments to improve its quality:


The article gives a brief introduction of the concept of loss aversion. It is informative, but the description is scattered and unfocused. The main part of the text focus on the endowment effect. Yet, the article does not mention several relevant issues relating the endowment effect and loss aversion such as subject misconceptions (Plott and Zeiler, 2005) and experience (List, 2004). The implications of loss aversion also goes far beyond the endowment effect. It could be worth mentioning that economically important contexts and phenomena such as wage rigidity and portfolio choice are also linked to loss aversion.

One central component of loss aversion (and prospect theory in general) is reference dependence. This should have been pointed out more clearly. One of the weaknesses of models building on loss aversion is that it is not clear what constitutes the reference point and in response to this, several recent models have specified expected outcomes as a natural reference point (see for example Köszegi and Rabin, 2006).


Plott Charles R. and Kathryn Zeiler, “The Willingness to Pay-Willingness to Accept Gap, the "Endowment Effect," Subject Misconceptions, and Experimental Procedures for Eliciting Valuations,” The American Economic Review, 2005, 95(3): 530-545. List, John A. “Neoclassical Theory Versus Prospect Theory: Evidence from the Marketplace,” Econometrica (2004), 72(2): 615-625.

Köszegi, Botond and Matthew Rabin, “A Model of Reference-Dependent Preferences,” Quarterly Journal of Economics, 2006, 121 (4), 1133–1165


We hope Wikipedians on this talk page can take advantage of these comments and improve the quality of the article accordingly.

We believe Dr. Wengstrom has expertise on the topic of this article, since he has published relevant scholarly research:


  • Reference : Ola Andersson & Hakan J. Holm & Jean-Robert Tyran & Erik Wengstrom, 2013. "Deciding for Others Reduces Loss Aversion," Discussion Papers 13-09, University of Copenhagen. Department of Economics.

ExpertIdeasBot (talk) 19:09, 26 July 2016 (UTC)