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What is Loss Aversion?

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Author Info
Ulrich Schmidt ()
Horst Zank

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Abstract

A behavioral definition of loss aversion is proposed and its implications for original and cumulative prospect theory are analyzed. Original prospect theory is in agreement with the new loss aversion condition, and there utility is capturing all effects of loss aversion. In cumulative prospect theory loss aversion is captured by both the weighting functions and the utility function. Further, some restrictions apply for the weighting functions involved in the latter model. Copyright Springer Science + Business Media, Inc. 2005

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File URL: http://hdl.handle.net/10.1007/s11166-005-6564-6
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Publisher Info
Article provided by Springer in its journal Journal of Risk and Uncertainty.

Volume (Year): 30 (2005)
Issue (Month): 2 (January)
Pages: 157-167
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:kap:jrisku:v:30:y:2005:i:2:p:157-167

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Web page: http://www.springerlink.com/link.asp?id=100299

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Related research
Keywords: prospect theory; loss aversion;

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References listed on IDEAS
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.:
  1. Neilson, William S, 2002. " Comparative Risk Sensitivity with Reference-Dependent Preferences," Journal of Risk and Uncertainty, Springer, vol. 24(2), pages 131-42, March. [Downloadable!] (restricted)
  2. Abdellaoui, Mohammed & Vossman, Frank & Weber, Martin, 2003. "Choice-Based Elicitation and Decomposition of Decision Weights for Gains and Losses Under Uncertainty," CEPR Discussion Papers 3756, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  3. Drazen Prelec, 1998. "The Probability Weighting Function," Econometrica, Econometric Society, vol. 66(3), pages 497-528, May.
  4. 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.
  5. Matthew Rabin & Richard H. Thaler, 2001. "Anomalies: Risk Aversion," Journal of Economic Perspectives, American Economic Association, vol. 15(1), pages 219-232, Winter. [Downloadable!] (restricted)
  6. Hong, Chew Soo & Karni, Edi & Safra, Zvi, 1987. "Risk aversion in the theory of expected utility with rank dependent probabilities," Journal of Economic Theory, Elsevier, vol. 42(2), pages 370-381, August. [Downloadable!] (restricted)
  7. Berkelaar, A.B. & Kouwenberg, R.R.P., 2000. "From boom til bust: how loss aversion affects asset prices," Econometric Institute Report EI 2000-21/A Revision_Dat, Erasmus University Rotterdam, Econometric Institute. [Downloadable!]
  8. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December. [Downloadable!] (restricted)
  9. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March. [Downloadable!] (restricted)
  10. U Schmidt & H Zank, 2002. "Risk Aversion in Cumulative Prospect Theory," The School of Economics Discussion Paper Series 0207, Economics, The University of Manchester. [Downloadable!]
    Other versions:
  11. Benartzi, Shlomo & Thaler, Richard H, 1995. "Myopic Loss Aversion and the Equity Premium Puzzle," The Quarterly Journal of Economics, MIT Press, vol. 110(1), pages 73-92, February. [Downloadable!] (restricted)
    Other versions:
  12. Wakker, Peter & Tversky, Amos, 1993. " An Axiomatization of Cumulative Prospect Theory," Journal of Risk and Uncertainty, Springer, vol. 7(2), pages 147-75, October.
  13. Berkelaar, A.B. & Kouwenberg, R.R.P., 2000. "Optimal portfolio choice under loss aversion," Econometric Institute Report EI 2000-08/A Revision_Dat, Erasmus University Rotterdam, Econometric Institute. [Downloadable!]
  14. Schmidt, Ulrich & Traub, Stefan, 2002. " An Experimental Test of Loss Aversion," Journal of Risk and Uncertainty, Springer, vol. 25(3), pages 233-49, November. [Downloadable!] (restricted)
  15. 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. [Downloadable!] (restricted)
  16. Chateauneuf, Alain & Cohen, Michele, 1994. "Risk Seeking with Diminishing Marginal Utility in a Non-expected Utility Model," Journal of Risk and Uncertainty, Springer, vol. 9(1), pages 77-91, July.
  17. A. Berkelaar & R. Kouwenberg, 2000. "Optimal portfolio choice under loss aversion," Econometric Institute Report 187, Erasmus University Rotterdam, Econometric Institute. [Downloadable!]
    Other versions:
  18. Nicholas Barberis & Ming Huang & Tano Santos, 2001. "Prospect Theory And Asset Prices," The Quarterly Journal of Economics, MIT Press, vol. 116(1), pages 1-53, February. [Downloadable!] (restricted)
  19. Samuelson, William & Zeckhauser, Richard, 1988. " Status Quo Bias in Decision Making," Journal of Risk and Uncertainty, Springer, vol. 1(1), pages 7-59, March.
  20. P Brooks & H Zank, 2004. "Attitudes on Gain and Loss Lotteries: A Simple Experiment," The School of Economics Discussion Paper Series 0402, Economics, The University of Manchester. [Downloadable!]
  21. Matthew Rabin, 2000. "Risk Aversion and Expected-Utility Theory: A Calibration Theorem," Econometrica, Econometric Society, vol. 68(5), pages 1281-1292, September.
Full references

Cited by:
(explanations, 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.)

  1. Peter Brooks & Horst Zank, 2005. "Loss Averse Behavior," Journal of Risk and Uncertainty, Springer, vol. 31(3), pages 301-325, December. [Downloadable!] (restricted)
  2. Luis Muga & Rafael Santamaría, 2009. "Momentum, market states and investor behavior," Empirical Economics, Springer, vol. 37(1), pages 105-130, September. [Downloadable!] (restricted)
  3. Bernard, Carole & Ghossoub, Mario, 2009. "Static Portfolio Choice under Cumulative Prospect Theory," MPRA Paper 15446, University Library of Munich, Germany, revised 29 Apr 2009. [Downloadable!]
  4. Matteo Rizzolli & Luca Stanca, 2009. "Judicial Errors and Crime Deterrence: Theory and Experimental Evidence," Working Papers 170, University of Milano-Bicocca, Department of Economics, revised Aug 2009. [Downloadable!]
  5. Horst Zank, 2007. "On the Paradigm of Loss Aversion," The School of Economics Discussion Paper Series 0710, Economics, The University of Manchester. [Downloadable!]
  6. P Brooks & H Zank, 2004. "Attitudes on Gain and Loss Lotteries: A Simple Experiment," The School of Economics Discussion Paper Series 0402, Economics, The University of Manchester. [Downloadable!]
  7. José L. B. Fernandes & Juan Ignacio Peña & Benjamin M. Tabak, 2006. "Myopic Loss Aversion and House-Money Effect Overseas: an experimental approach," Working Papers Series 115, Central Bank of Brazil, Research Department. [Downloadable!]
  8. Mohammed Abdellaoui & Olivier l’Haridon & Horst Zank, 2009. "Separating Curvature and Elevation: A Parametric Weighting Function," The School of Economics Discussion Paper Series 0901, Economics, The University of Manchester. [Downloadable!]
  9. Enrico Diecidue & Ulrich Schmidt & Horst Zank, 2006. "Parametric Weighting Functions," The School of Economics Discussion Paper Series 0622, Economics, The University of Manchester. [Downloadable!]
    Other versions:
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