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Exploring the Nature of Loss Aversion

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Author Info
Eric Johnson (Columbia Business School, Columbia University)
Simon Gaechter (University of Nottingham)
Andreas Herrmann (Zentrum for Business Metrics, St.Gallen Universitaet)

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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.

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Paper provided by The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham in its series Discussion Papers with number 2006-02.

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Date of creation: Feb 2006
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Handle: RePEc:cdx:dpaper:2006-02

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  1. Carmon, Ziv & Ariely, Dan, 2000. "Focusing on the Forgone: How Value Can Appear So Different to Buyers and Sellers," Journal of Consumer Research: An Interdisciplinary Quarterly, University of Chicago Press, vol. 27(3), pages 360-70, December.
  2. Camerer, Colin, et al, 1997. "Labor Supply of New York City Cabdrivers: One Day at a Time," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 407-41, May.
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  3. 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, 02. [Downloadable!] (restricted)
  4. Kobberling, Veronika & Wakker, Peter P., 2005. "An index of loss aversion," Journal of Economic Theory, Elsevier, vol. 122(1), pages 119-131, May. [Downloadable!] (restricted)
  5. Heath, Timothy B, et al, 2000. "Asymmetric Competition in Choice and the Leveraging of Competitive Disadvantages," Journal of Consumer Research: An Interdisciplinary Quarterly, University of Chicago Press, vol. 27(3), pages 291-308, December.
  6. Alba, Joseph W & Hutchinson, J Wesley, 1987. "Dimensions of Consumer Expertise," Journal of Consumer Research: An Interdisciplinary Quarterly, University of Chicago Press, vol. 13(4), pages 411-54, March.
  7. 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. [Downloadable!] (restricted)
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  8. 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. [Downloadable!] (restricted)
  9. Camerer, Colin F., 1998. "Prospect Theory in the Wild: Evidence From the Field," Working Papers 1037, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
  10. John A. List, 2003. "Does Market Experience Eliminate Market Anomalies?," The Quarterly Journal of Economics, MIT Press, vol. 118(1), pages 41-71, February. [Downloadable!] (restricted)
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