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Exploring the Nature of Loss Aversion

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  • Johnson, Eric J.

    (Columbia University)

  • Gächter, Simon

    (University of Nottingham)

  • Herrmann, Andreas

    (University of St. Gallen)

Abstract

Loss aversion, the fact that losses have a greater impact than gains, is a fundamental property of behavioral accounts of choice. In this paper, we suggest four possible characterizations of the relative impact of losses and gains: (1) It could be a constant, such as the much cited value of 2, as in losses have twice the impact of gains. (2) It could be a systematic individual difference, with some individuals more or less loss aversion, (3) it could be a property of the attribute, or (4) a property of the different processes used to construct selling and buying prices. We examine the behavior of a large sample of auto buyers using an experiment which allows us to measure loss aversion, at the individual level for several different attributes. A set of hierarchical linear models shows that to understand loss aversion, one must consider the process used to construct prices. Interestingly, we show that knowledge of the attribute lowers loss aversion and that age and attribute importance increases loss aversion.

Suggested Citation

  • Johnson, Eric J. & Gächter, Simon & Herrmann, Andreas, 2006. "Exploring the Nature of Loss Aversion," IZA Discussion Papers 2015, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp2015
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    Cited by:

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    2. Simon Gächter & Eric J. Johnson & Andreas Herrmann, 2022. "Individual-level loss aversion in riskless and risky choices," Theory and Decision, Springer, vol. 92(3), pages 599-624, April.
    3. Richard A. Martina, 2020. "Toward a theory of affordable loss," Small Business Economics, Springer, vol. 54(3), pages 751-774, March.
    4. Xiaojing Kong, 2008. "Loss Aversion and Rent-Seeking: An Experimental Study," Discussion Papers 2008-13, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
    5. Bilgin, Baler, 2012. "Losses loom more likely than gains: Propensity to imagine losses increases their subjective probability," Organizational Behavior and Human Decision Processes, Elsevier, vol. 118(2), pages 203-215.
    6. Xiaojing Kong, 2008. "Loss Aversion and Rent-Seeking: An Experimental Study," Discussion Papers 2008-13, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
    7. Aldo Pignataro, 2019. "The effects of loss aversion on deceptive advertising policies," Theory and Decision, Springer, vol. 87(4), pages 451-472, November.
    8. De Borger, Bruno & Fosgerau, Mogens, 2008. "The trade-off between money and travel time: A test of the theory of reference-dependent preferences," Journal of Urban Economics, Elsevier, vol. 64(1), pages 101-115, July.
    9. Olena LIASHENKO & Tetyana KRAVETS & Matvii PROKOPENKO, 2021. "Consumer behavior clustering of food retail chains by machine learning algorithms," Access Journal, Access Press Publishing House, vol. 2(3), pages 234-251, September.
    10. Thomas Dohmen & Armin Falk & David Huffman & Uwe Sunde, 2010. "Are Risk Aversion and Impatience Related to Cognitive Ability?," American Economic Review, American Economic Association, vol. 100(3), pages 1238-1260, June.
    11. Lamorgese, Andrea R. & Pellegrino, Dario, 2022. "Loss aversion in housing appraisal: Evidence from Italian homeowners," Journal of Housing Economics, Elsevier, vol. 56(C).
    12. Gächter, Simon & Johnson, Eric J. & Herrmann, Andreas, 2007. "Individual-Level Loss Aversion in Riskless and Risky Choices," IZA Discussion Papers 2961, Institute of Labor Economics (IZA).
    13. Ha, Kyoungnam Catherine & Song, Reo & Erickson, Gary, 2021. "Multidimensional brand equity and asymmetric risk," International Journal of Research in Marketing, Elsevier, vol. 38(3), pages 593-614.
    14. Thomas Meissner & Xavier Gassmann & Corinne Faure & Joachim Schleich, 2023. "Individual characteristics associated with risk and time preferences: A multi country representative survey," Journal of Risk and Uncertainty, Springer, vol. 66(1), pages 77-107, February.
    15. Andrea Lamorgese & Dario Pellegrino, 2019. "Loss aversion in housing price appraisals among Italian homeowners," Temi di discussione (Economic working papers) 1248, Bank of Italy, Economic Research and International Relations Area.
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    More about this item

    Keywords

    reference-dependent preferences; consumer choice; loss aversion;
    All these keywords.

    JEL classification:

    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
    • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory

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