A preference foundation for constant loss aversion
AbstractFollowing prospect theory and in particular the concept of loss aversion, introduced by Kahneman and Tversky (1979), we consider decision making under risk in which the decision maker’s preferences depend on a reference outcome. An outcome below this reference outcome is regarded as resulting from a loss: a loss decreases the decision maker’s basic utility more than a comparable gain increases this utility. An elegant and simple way to model this phenomenon was proposed by Shalev (2002): the utility of an outcome below the reference outcome is obtained from the basic utility by subtracting a multiple of the loss in basic utility: this multiple, the loss aversion coefficient, is constant across different reference outcomes. We provide a preference foundation for this loss aversion model.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Elsevier in its journal Journal of Mathematical Economics.
Volume (Year): 48 (2012)
Issue (Month): 1 ()
Contact details of provider:
Web page: http://www.elsevier.com/locate/jmateco
Decision making under risk; Reference outcome; Loss aversion;
Other versions of this item:
- Peters Hans, 2010. "A preference foundation for constant loss aversion," Research Memorandum 062, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Tversky, Amos & Kahneman, Daniel, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1039-61, November.
- Mohammed Abdellaoui & Han Bleichrodt & Corina Paraschiv, 2007. "Loss Aversion Under Prospect Theory: A Parameter-Free Measurement," Management Science, INFORMS, vol. 53(10), pages 1659-1674, October.
- Driesen, Bram & Perea, Andrés & Peters, Hans, 2007.
"On loss aversion in bimatrix games,"
033, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
- Dunn, L F, 1996. "Loss Aversion and Adaptation in the Labor Market: Empirical Indifference Functions and Labor Supply," The Review of Economics and Statistics, MIT Press, vol. 78(3), pages 441-50, August.
- Lorenz Goette & David Huffman & Ernst Fehr, 2004.
"Loss Aversion and Labor Supply,"
Journal of the European Economic Association,
MIT Press, vol. 2(2-3), pages 216-228, 04/05.
- Lorenz Goette & David Huffman & Ernst Fehr, . "Loss Aversion and Labor Supply," IEW - Working Papers 178, Institute for Empirical Research in Economics - University of Zurich.
- Götte, Lorenz & Huffman, David B. & Fehr, Ernst, 2003. "Loss Aversion and Labor Supply," IZA Discussion Papers 927, Institute for the Study of Labor (IZA).
- Ernst Fehr & David Huffman & Lorenz Goette, 2004. "Loss Aversion And Labor Supply," Method and Hist of Econ Thought 0409003, EconWPA.
- Genesove, David & Mayer, Christopher, 2001.
"Loss Aversion and Seller Behaviour: Evidence from the Housing Market,"
CEPR Discussion Papers
2813, C.E.P.R. Discussion Papers.
- David Genesove & Christopher Mayer, 2001. "Loss Aversion And Seller Behavior: Evidence From The Housing Market," The Quarterly Journal of Economics, MIT Press, vol. 116(4), pages 1233-1260, November.
- David Genesove & Christopher Mayer, 2001. "Loss Aversion and Seller Behavior: Evidence from the Housing Market," NBER Working Papers 8143, National Bureau of Economic Research, Inc.
- David Genesove & Christopher Mayer, . "Loss Aversion and Seller Behavior: Evidence from the Housing Market," Zell/Lurie Center Working Papers 323, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania.
- Botond Koszegi & Matthew Rabin, 2005.
"A Model of Reference-Dependent Preferences,"
784828000000000341, UCLA Department of Economics.
- Botond Koszegi & Matthew Rabin, 2004. "A Model of Reference-Dependent Preferences," Method and Hist of Econ Thought 0407001, EconWPA.
- Koszegi, Botond & Rabin, Matthew, 2004. "A Model of Reference-Dependent Preferences," Department of Economics, Working Paper Series qt0w82b6nm, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Rina Rosenblatt-Wisch, 2007.
"Loss Aversion in Aggregate Macroeconomic Time Series,"
2007-06, Swiss National Bank.
- Rosenblatt-Wisch, Rina, 2008. "Loss aversion in aggregate macroeconomic time series," European Economic Review, Elsevier, vol. 52(7), pages 1140-1159, October.
- Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
- Harry Markowitz, 1952. "The Utility of Wealth," Journal of Political Economy, University of Chicago Press, vol. 60, pages 151.
- Ingolf Dittmann & Ernst Maug & Oliver Spalt, 2010. "Sticks or Carrots? Optimal CEO Compensation when Managers Are Loss Averse," Journal of Finance, American Finance Association, vol. 65(6), pages 2015-2050, December.
- Caroline Freund & Caglar Ozden, 2008. "Trade Policy and Loss Aversion," American Economic Review, American Economic Association, vol. 98(4), pages 1675-91, September.
- Kobberling, Veronika & Wakker, Peter P., 2005. "An index of loss aversion," Journal of Economic Theory, Elsevier, vol. 122(1), pages 119-131, May.
- Sugden, Robert, 2003. "Reference-dependent subjective expected utility," Journal of Economic Theory, Elsevier, vol. 111(2), pages 172-191, August.
- Ulrich Schmidt & Horst Zank, 2012.
"A genuine foundation for prospect theory,"
Journal of Risk and Uncertainty,
Springer, vol. 45(2), pages 97-113, October.
- Driesen, Bram & Perea, Andrés & Peters, Hans, 2012.
"Alternating offers bargaining with loss aversion,"
Mathematical Social Sciences,
Elsevier, vol. 64(2), pages 103-118.
- Driesen, Bram & Perea, Andrés & Peters, Hans, 2011. "The Kalai-Smorodinsky bargaining solution with loss aversion," Mathematical Social Sciences, Elsevier, vol. 61(1), pages 58-64, January.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If references are entirely missing, you can add them using this form.