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Loss Aversion and Consumption Choice: Theory and Experimental Evidence

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

Abstract

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.

Suggested Citation

  • Kirchsteiger, Georg & Peitz, Martin & Karle, Heiko, 2012. "Loss Aversion and Consumption Choice: Theory and Experimental Evidence," CEPR Discussion Papers 9183, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:9183
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    More about this item

    Keywords

    Contextual reference points; Loss aversion; Reference-dependent utility;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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