IDEAS home Printed from https://ideas.repec.org/p/iza/izadps/dp2015.html
   My bibliography  Save this paper

Exploring the Nature of Loss Aversion

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: https://docs.iza.org/dp2015.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Colin Camerer & Linda Babcock & George Loewenstein & Richard Thaler, 1997. "Labor Supply of New York City Cabdrivers: One Day at a Time," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(2), pages 407-441.
    2. Michael S. Haigh & John A. List, 2005. "Do Professional Traders Exhibit Myopic Loss Aversion? An Experimental Analysis," Journal of Finance, American Finance Association, vol. 60(1), pages 523-534, February.
    3. Heath, Timothy B, et al, 2000. "Asymmetric Competition in Choice and the Leveraging of Competitive Disadvantages," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 27(3), pages 291-308, December.
    4. David Genesove & Christopher Mayer, 2001. "Loss Aversion and Seller Behavior: Evidence from the Housing Market," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(4), pages 1233-1260.
    5. Amos Tversky & Daniel Kahneman, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(4), pages 1039-1061.
    6. Horowitz, John K. & McConnell, Kenneth E., 2002. "A Review of WTA/WTP Studies," Journal of Environmental Economics and Management, Elsevier, vol. 44(3), pages 426-447, November.
    7. Charles R. Plott & Kathryn Zeiler, 2005. "The Willingness to Pay–Willingness to Accept Gap, the "Endowment Effect," Subject Misconceptions, and Experimental Procedures for Eliciting Valuations," American Economic Review, American Economic Association, vol. 95(3), pages 530-545, June.
    8. Gregory W. Fischer & Ziv Carmon & Dan Ariely & Gal Zauberman, 1999. "Goal-Based Construction of Preferences: Task Goals and the Prominence Effect," Management Science, INFORMS, vol. 45(8), pages 1057-1075, August.
    9. Timothy B. Heath & Gangseog Ryu & Subimal Chatterjee & Michael S. Mccarthy & David L. Mothersbaugh & Sandra J. Milberg & Gary J. Gaeth, 2000. "Asymmetric Competition in Choice and the Leveraging of Competitive Disadvantages," Post-Print hal-00668916, HAL.
    10. John A. List, 2003. "Does Market Experience Eliminate Market Anomalies?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(1), pages 41-71.
    11. Alba, Joseph W & Hutchinson, J Wesley, 1987. "Dimensions of Consumer Expertise," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 13(4), pages 411-454, March.
    12. John A. List, 2004. "Neoclassical Theory Versus Prospect Theory: Evidence from the Marketplace," Econometrica, Econometric Society, vol. 72(2), pages 615-625, March.
    13. Sayman, Serdar & Onculer, Ayse, 2005. "Effects of study design characteristics on the WTA-WTP disparity: A meta analytical framework," Journal of Economic Psychology, Elsevier, vol. 26(2), pages 289-312, April.
    14. Daniel S. Putler, 1992. "Incorporating Reference Price Effects into a Theory of Consumer Choice," Marketing Science, INFORMS, vol. 11(3), pages 287-309.
    15. Carmon, Ziv & Ariely, Dan, 2000. "Focusing on the Forgone: How Value Can Appear So Different to Buyers and Sellers," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 27(3), pages 360-370, December.
    16. Kobberling, Veronika & Wakker, Peter P., 2005. "An index of loss aversion," Journal of Economic Theory, Elsevier, vol. 122(1), pages 119-131, May.
    17. Bruce G. S. Hardie & Eric J. Johnson & Peter S. Fader, 1993. "Modeling Loss Aversion and Reference Dependence Effects on Brand Choice," Marketing Science, INFORMS, vol. 12(4), pages 378-394.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Armin Falk & Thomas Dohmen & Uwe Sunde, 2009. "Kontrolliert und repräsentativ: Beispiele zur Komplementarität von Labor‐ und Felddaten," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 10(s1), pages 54-74, May.
    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.
    16. Katrine Hjorth & Mogens Fosgerau, 2011. "Loss Aversion and Individual Characteristics," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 49(4), pages 573-596, August.
    17. Thiemann, Kathrin, 2017. "Ability tracking or comprehensive schooling? A theory on peer effects in competitive and non-competitive cultures," Journal of Economic Behavior & Organization, Elsevier, vol. 137(C), pages 214-231.
    18. Eitan Hourie & Miki Malul & Raphael Bar-El, 2018. "The Value of Job Security: Does Having It Matter?," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 139(3), pages 1131-1145, October.
    19. Ciccarone, Giuseppe & Giuli, Francesco & Marchetti, Enrico, 2019. "Macroeconomic equilibrium and nominal price rigidities under imperfect rationality," Journal of Macroeconomics, Elsevier, vol. 60(C), pages 60-78.
    20. Masatlioglu, Yusufcan & Uler, Neslihan, 2013. "Understanding the reference effect," Games and Economic Behavior, Elsevier, vol. 82(C), pages 403-423.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Eric Johnson & Simon Gaechter & Andreas Herrmann, 2006. "Exploring the Nature of Loss Aversion," Discussion Papers 2006-02, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
    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. 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).
    4. Neumann, Nico & Böckenholt, Ulf, 2014. "A Meta-analysis of Loss Aversion in Product Choice," Journal of Retailing, Elsevier, vol. 90(2), pages 182-197.
    5. Walasek, Lukasz & Mullett, Timothy L. & Stewart, Neil, 2024. "A meta-analysis of loss aversion in risky contexts," Journal of Economic Psychology, Elsevier, vol. 103(C).
    6. Botond Kőszegi & Matthew Rabin, 2006. "A Model of Reference-Dependent Preferences," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 121(4), pages 1133-1165.
    7. Stefano DellaVigna, 2009. "Psychology and Economics: Evidence from the Field," Journal of Economic Literature, American Economic Association, vol. 47(2), pages 315-372, June.
    8. Masatlioglu, Yusufcan & Uler, Neslihan, 2013. "Understanding the reference effect," Games and Economic Behavior, Elsevier, vol. 82(C), pages 403-423.
    9. Andrea Isoni, 2011. "The willingness-to-accept/willingness-to-pay disparity in repeated markets: loss aversion or ‘bad-deal’ aversion?," Theory and Decision, Springer, vol. 71(3), pages 409-430, September.
    10. Teck H. Ho & Noah Lim & Colin Camerer, 2005. "Modeling the Psychology of Consumer and Firm Behavior with Behavioral Economics," Levine's Bibliography 784828000000000476, UCLA Department of Economics.
    11. Smith, Alec, 2019. "Lagged beliefs and reference-dependent utility," Journal of Economic Behavior & Organization, Elsevier, vol. 167(C), pages 331-340.
    12. Lunn, Pete & Lunn, Mary, 2014. "A Computational Theory of Willingness to Exchange," Papers WP477, Economic and Social Research Institute (ESRI).
    13. Brian Albrecht & Omar Al-Ubaydli & Peter Boettke, 2022. "Testing the Hayek hypothesis: Recent theoretical and experimental evidence," Artefactual Field Experiments 00759, The Field Experiments Website.
    14. Peter D. Lunn, 2013. "Telecommunications Consumers: A Behavioral Economic Analysis," Journal of Consumer Affairs, Wiley Blackwell, vol. 47(1), pages 167-189, April.
    15. Alex Markle & George Wu & Rebecca White & Aaron Sackett, 2018. "Goals as reference points in marathon running: A novel test of reference dependence," Journal of Risk and Uncertainty, Springer, vol. 56(1), pages 19-50, February.
    16. Gong, Cynthia M. & Lizieri, Colin & Bao, Helen X.H., 2019. "“Smarter information, smarter consumers”? Insights into the housing market," Journal of Business Research, Elsevier, vol. 97(C), pages 51-64.
    17. Knetsch, Jack L. & Wong, Wei-Kang, 2009. "The endowment effect and the reference state: Evidence and manipulations," Journal of Economic Behavior & Organization, Elsevier, vol. 71(2), pages 407-413, August.
    18. Jack L. Knetsch, 2013. "Values of gains and losses: reference states and choice of measure," Chapters, in: John A. List & Michael K. Price (ed.), Handbook on Experimental Economics and the Environment, chapter 5, pages 157-170, Edward Elgar Publishing.
    19. Lindsay, Luke, 2019. "Adaptive loss aversion and market experience," Journal of Economic Behavior & Organization, Elsevier, vol. 168(C), pages 43-61.
    20. Brian Chi-ang Lin & Siqi Zheng & Doruk İriş, 2016. "Economic Targets And Loss-Aversion In International Environmental Cooperation," Journal of Economic Surveys, Wiley Blackwell, vol. 30(3), pages 624-648, July.

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:iza:izadps:dp2015. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Holger Hinte (email available below). General contact details of provider: https://edirc.repec.org/data/izaaade.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.