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How risk-prone are people when facing a sure loss? Negative interest rates as a convenient conceptual framework

Author

Listed:
  • Efendić, Emir

    (Université catholique de Louvain)

  • Corneille, Olivier

    (Université catholique de Louvain)

  • D’Hondt, Catherine

    (Université catholique de Louvain, LIDAM/LFIN, Belgium)

  • De Winne, Rudy

    (Université catholique de Louvain, LIDAM/LFIN, Belgium)

Abstract

People occasionally face sure loss prospects. Do they seek risk in search of better outcomes or contend with the sure loss and focus on what is left to be saved? We addressed this question in three experiments akin to a negative interest rate framework. Specifically, we asked participants to allocate money (Experiments 1 and 2) or choose (Experiment 3) between two options: (i) a loss option where, for sure, they would end up with less, or (ii) a mixed gamble with a positive expected outcome, but also the possibility of an even larger loss. Risk aversion (i.e., choosing the sure loss) ranged from 80% to 36% across the three experiments, dependent on varied sizes of sure losses or expected outcomes. However, overall, the majority (> 50%) of allocations and choices were for the sure loss. Our findings indicate a tolerance for sure losses at the expense of mixed gambles yielding much better expected outcomes. We discuss the implications of this sure-loss tolerance for psychological research, its implications in terms of (cumulative) prospect theory, and what the results mean for the implementation of negative interest rates.

Suggested Citation

  • Efendić, Emir & Corneille, Olivier & D’Hondt, Catherine & De Winne, Rudy, 2021. "How risk-prone are people when facing a sure loss? Negative interest rates as a convenient conceptual framework," LIDAM Reprints LFIN 2021008, Université catholique de Louvain, Louvain Finance (LFIN).
    • Handle: RePEc:ajf:louvlr:2021008
    DOI: https://doi.org/10.3758/s13423-021-01921-0
    Note: In: Psychonomic Bulletin & Review, 2021
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