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On Loss Aversion, Level-1 Reasoning, and Betting

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Author Info

  • Ido Erev

    ()
    (Faculty of Industrial Engineering and Management, Technion)

  • Sharon Gilat-Yihyie

    ()
    (Department of Psychology, Western Galilee College)

  • Davide Marchiori

    ()
    (Department of Management, Università Ca' Foscari Venezia)

  • Doron Sonsino

    ()
    (The School of Business Administration, The College of Management)

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    Abstract

    Previous research suggests that human reaction to risky opportunities reflects two contradicting biases: Òloss aversion", and Òlimited level of reasoning" that leads to overconfidence. Rejection of attractive gambles is explained by loss aversion, while counterproductive risk seeking is attributed to limited level of reasoning. The current research highlights a shortcoming of this popular (but often implicit) "contradicting biases" assertion. Studies of "negative-sum betting games" reveal high rate of counterproductive betting even when limited level of reasoning and loss aversion imply no betting. The results reflect two reasons for the high betting rate: initial tendency to participate and slow learning. Under certain conditions, the observed betting rate was higher than the rate predicted under random choice even after 250 trials with immediate feedback. These results can be captured with a model that assumes a tendency to select strategies that have led to good outcomes in a small set of similar past experiences, and allows for an initial framing effect.

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    File URL: http://virgo.unive.it/wpideas/storage/2013wp2.pdf
    File Function: First version, 2013
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    Bibliographic Info

    Paper provided by Department of Management, Università Ca' Foscari Venezia in its series Working Papers with number 2.

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    Length: 30 pages
    Date of creation: Apr 2013
    Date of revision:
    Handle: RePEc:vnm:wpdman:38

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    Web page: http://www.unive.it/dip.management
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    Related research

    Keywords: Loss aversion; Level-1 reasoning; SamuelsonÕs Colleague; acquiring a company problem; market for lemons;

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