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Exploring the Nature of Loss Aversion

  • Johnson, Eric J.

    ()

    (Columbia University)

  • Gächter, Simon

    ()

    (University of Nottingham)

  • Herrmann, Andreas

    ()

    (University of St. Gallen)

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 Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2015.

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Length: 47 pages
Date of creation: Mar 2006
Date of revision:
Handle: RePEc:iza:izadps:dp2015
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  1. David Genesove & Christopher Mayer, 2001. "Loss Aversion And Seller Behavior: Evidence From The Housing Market," The Quarterly Journal of Economics, MIT Press, vol. 116(4), pages 1233-1260, November.
  2. John List, 2004. "Neoclassical theory versus prospect theory: Evidence from the marketplace," Framed Field Experiments 00174, The Field Experiments Website.
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  6. Haigh, Michael S. & List, John A., 2002. "Do Professional Traders Exhibit Myopic Loss Aversion? An Experimental Analysis," Working Papers 28554, University of Maryland, Department of Agricultural and Resource Economics.
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  9. Kobberling, Veronika & Wakker, Peter P., 2005. "An index of loss aversion," Journal of Economic Theory, Elsevier, vol. 122(1), pages 119-131, May.
  10. Tversky, Amos & Kahneman, Daniel, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1039-61, November.
  11. Bruce G. S. Hardie & Eric J. Johnson & Peter S. Fader, 1993. "Modeling Loss Aversion and Reference Dependence Effects on Brand Choice," Marketing Science, INFORMS, vol. 12(4), pages 378-394.
  12. Daniel S. Putler, 1992. "Incorporating Reference Price Effects into a Theory of Consumer Choice," Marketing Science, INFORMS, vol. 11(3), pages 287-309.
  13. Carmon, Ziv & Ariely, Dan, 2000. " Focusing on the Forgone: How Value Can Appear So Different to Buyers and Sellers," Journal of Consumer Research, University of Chicago Press, vol. 27(3), pages 360-70, December.
  14. Heath, Timothy B, et al, 2000. " Asymmetric Competition in Choice and the Leveraging of Competitive Disadvantages," Journal of Consumer Research, University of Chicago Press, vol. 27(3), pages 291-308, December.
  15. Horowitz, John K. & McConnell, Kenneth E., 2002. "A Review of WTA/WTP Studies," Journal of Environmental Economics and Management, Elsevier, vol. 44(3), pages 426-447, November.
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