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Loss Aversion and Consumption Choice: Theory and Experimental Evidence

  • Karle, Heiko
  • Kirchsteiger, Georg
  • Peitz, Martin

In this paper we analyze a consumer choice model with price uncertainty, loss aversion, and expectation-based reference points. The implications of this model are tested in an experiment in which participants have to make a consumption choice between two sandwiches. We make use of the fact that participants diff er in their reported taste difference between the two sandwiches and the degree of loss aversion which we measure separately. We find that more loss-averse participants are more likely to opt for the cheaper sandwich provided that their reported taste difference is below some threshold, confirming the model’s predictions.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9183.

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Date of creation: Oct 2012
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Handle: RePEc:cpr:ceprdp:9183
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  1. Matthew Rabin., 2000. "Risk Aversion and Expected-Utility Theory: A Calibration Theorem," Economics Working Papers E00-279, University of California at Berkeley.
  2. 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.
  3. Thierry Post & Martijn J. van den Assem & Guido Baltussen & Richard H. Thaler, 2008. "Deal or No Deal? Decision Making under Risk in a Large-Payoff Game Show," American Economic Review, American Economic Association, vol. 98(1), pages 38-71, March.
  4. Zhou, Jidong, 2008. "Reference Dependence and Market Competition," MPRA Paper 9370, University Library of Munich, Germany.
  5. Karle, Heiko & Peitz, Martin, 2012. "Competition under Consumer Loss Aversion," Working Papers 12-08, University of Mannheim, Department of Economics.
  6. Heiko Karle, 2013. "Creating Attachment through Advertising: Loss Aversion and Pre–Purchase Information," CER-ETH Economics working paper series 13/177, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
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