We consider bargaining situations where two players evaluate outcomes with reference-dependent utility functions, analyzing the effect of differing levels of loss aversion on bargaining outcomes. We find that as with risk aversion, increasing loss aversion for a player leads to worse outcomes for that player in bargaining situations. An extension of Nash's axioms is used to define a solution for bargaining problems with exogenous reference points. Using this solution concept we endogenize the reference points into (...) the model and find a unique solution giving reference points and outcomes that satisfy two reasonable properties, which we predict would be observed in a steady state. The resulting solution also emerges in two other approaches, a strategic (non-cooperative) approach using Rubinstein's (1982) alternating offers model and a dynamic approach in which we find that even under weak assumptions, outcomes and reference points converge to the steady state solution from any non-equilibrium state. (shrink)

In this article three different types of loss aversion equilibria in bimatrix games are studied. Loss aversion equilibria are Nash equilibria of games where players are loss averse and where the reference points—points below which they consider payoffs to be losses—are endogenous to the equilibrium calculation. The first type is the fixed point loss aversion equilibrium, introduced in Shalev (2000; Int. J. Game Theory 29(2):269) under the name of ‘myopic loss aversion (...) equilibrium.’ There, the players’ reference points depend on the beliefs about their opponents’ strategies. The second type, the maximin loss aversion equilibrium, differs from the fixed point loss aversion equilibrium in that the reference points are only based on the carriers of the strategies, not on the exact probabilities. In the third type, the safety level loss aversion equilibrium, the reference points depend on the values of the own payoff matrices. Finally, a comparative statics analysis is carried out of all three equilibrium concepts in 2 × 2 bimatrix games. It is established when a player benefits from his opponent falsely believing that he is loss averse. (shrink)

Inspired by Shalev’s model of loss aversion, we investigate the effect of loss aversion on a bimatrix game where the payoffs in the bimatrix game are characterized by triangular fuzzy variables. First, we define three solution concepts of credibilistic loss aversion Nash equilibria, and their existence theorems are presented. Then, three sufficient and necessary conditions are given to find the credibilistic loss aversion Nash equilibria. Moreover, the relationship among the three credibilistic (...) class='Hi'>loss aversion Nash equilibria is discussed in detail. Finally, for2×2bimatix game with triangular fuzzy payoffs, we investigate the effect of loss aversion coefficients and confidence levels on the three credibilistic loss aversion Nash equilibria. It is found that an increase of loss aversion levels of a player leads to a decrease of his/her own payoff. We also find that the equilibrium utilities of players are decreasing as their own confidence levels when players employ the optimistic value criterion. (shrink)

This paper reviews the most common approaches that have been adopted to analyze and describe loss aversion under prospect theory. Subsequently, it is argued that loss aversion is a property of observable choice behavior and two new definitions of loss averse behavior are advocated. Under prospect theory, the new properties hold if the commonly used utility based measures of loss aversion are corrected by a probability based measure of loss aversion and (...) their product exceeds 1. It is shown that prominent parametric families of weighting functions, while successful in accommodating empirical findings on probabilistic risk attitudes, may not fit well with the theoretical implications of the new loss averse behavior conditions. (shrink)

Loss aversion can occur in riskless and risky choices. We present novel evidence on both in a non-student sample (660 randomly selected customers of a car manufacturer). We measure loss aversion in riskless choice in endowment effect experiments within and between subjects and find similar levels of average loss aversion in both. The subjects of the within study also participate in a simple lottery choice task which arguably measures loss aversion in risky (...) choices. We find substantial heterogeneity in both measures of loss aversion. Loss aversion in riskless choice and loss aversion in risky choice are strongly positively correlated, but on average riskless loss aversion is higher than risky loss aversion. We find that in both choice tasks, loss aversion increases in age, income, and wealth, and decreases in education. Our results provide novel supportive input to the debate about the reality of loss aversion. (shrink)

Wagering contingent on a previous decision, or post-decision wagering, has recently been proposed to measure conscious awareness. Whilst intuitively appealing, it remains unclear whether economic context interacts with subjective confidence and how such interactions might impact on the measurement of awareness. Here we propose a signal detection model which predicts that advantageous wagers placed on the identity of preceding stimuli are affected by loss aversion, despite stimulus visibility remaining constant. This pattern of predicted results was evident in a (...) psychophysical task where we independently manipulated perceptual and economic factors. Changes in wagering behaviour induced by changes in wager size were largely driven by changes in criterion, consistent with the model. However, for near-threshold stimuli, a reduction in wagering efficiency was also evident, consistent with an apparent but potentially illusory decrease in awareness of the stimulus. These findings challenge an assertion that post-decision wagering provides a direct index of subjective awareness. (shrink)

For loss averse investors, a sequence of risky investments looks less attractive if it is evaluated myopically—an effect called myopic loss aversion (MLA). The consequences of this effect have been confirmed in several experiments and its robustness is largely undisputed. The effect’s causes, however, have not been thoroughly examined with regard to one important aspect. Due to the construction of the lotteries that were used in the experiments, none of the studies is able to distinguish between MLA (...) and an explanation based on (myopic) loss probability aversion (MLPA). This distinction is important, however, in discussion of the practical relevance and the generalizability of the phenomenon. We designed an experiment that is able to disentangle lottery attractiveness and loss probabilities. Our analysis reveals that mere loss probabilities are not as important in this dynamic context as previous findings in other domains suggest. The results favor the MLA over the MLPA explanation. (shrink)

We extend the deceptive advertising model of Piccolo et al. :611–624, 2015) to a framework in which consumers may be loss averse. There are two sellers, competing on prices and offering experience goods with some differences in quality. Prospective customers may be harmed by deceptive advertising: a marketing practice that can induce them to make bad purchases. We show that although deceptive advertising occurs depending on the degree of consumers’ loss aversion, this behavioral bias does not reflect (...) on firms’ prices. Nevertheless, the presence of loss-averse consumers crucially changes the optimal deterrence rule that a Public Authority should adopt against false claims and misleading advertising. Unlike Piccolo et al., in this more general model, strong enforcements may improve the buyer welfare according to the degree of loss aversion. (shrink)

Investors who are more willing to accept risks when evaluating their investments less frequently are said to exhibit myopic loss aversion (MLA). Several recent experimental studies found that, on average, subjects bet significantly higher amounts on a risky lottery when they observe only a cumulative outcome of several realizations of the lottery (long evaluation period). In this article, we reexamine these empirical findings by analyzing individual rather than aggregate choice patterns. The behavior of the majority of subjects is (...) inconsistent with the hypothesis of MLA: they bet an intermediate fraction of their initial endowment and these bets, on average, are not significantly different across two treatments with short and long evaluation period. We discuss several alternative explanations of this finding, including the Fechner model of random errors and the financial asset pricing model. (shrink)

Food safety and food quality are two closely related aspects of the food management system. The difference between the two is that one keeps consumers safe while the other keeps consumers satisfied. This study examined the differences in how consumers value food safety and food quality with a focus on the influence of loss aversion on one’s psychological level and of income effect on one’s socio-demographic level. Our findings indicate that loss aversion and income effect significantly (...) influence the way consumers value food safety vs. quality labels when considering potential health risks and food price. High risk-averse and low-income consumers with strong loss aversion and a weak income effect show a higher demand for food safety labels as a way to ensure easy access to safety indications. Low risk-averse and high-income consumers with weak loss aversion and a strong income effect show a higher demand for food quality labels because they hope to gain more health benefits from high-quality food at good prices. This study provides insights that will assist public authorities and food industry in balancing food safety control and food quality improvement in order to meet the heterogeneous market demand changing alongside the transition of China’s food consumption and production. (shrink)

Several experimental studies have reported that an otherwise robust regularity—the disparity between Willingness-To-Accept and Willingness-To-Pay—tends to be greatly reduced in repeated markets, posing a serious challenge to existing reference-dependent and reference-independent models alike. This article offers a new account of the evidence, based on the assumptions that individuals are affected by good and bad deals relative to the expected transaction price (price sensitivity), with bad deals having a larger impact on their utility (`bad-deal’ aversion). These features of preferences explain (...) the existing evidence better than alternative approaches, including the most recent developments of loss aversion models. (shrink)

The life-cycle theory of saving behavior (Modigliani, 1988) suggests that humans strive towards an equal intertemporal distribution of wealth. However, behavioral life-cycle theory (Shefrin & Thaler, 1988) proposes that people use self-control heuristics to postpone wealth until later in life. According to this theory, people use a system of cognitive budgeting known as mental accounting. In the present study it was found that mental accounts were used differently depending on if the income change was positive or negative. This was shown (...) both in a representative nationwide sample of households and in a student sample. Respondents were more willing to cut down on their propensity to consume when faced with an income decrease than to raise it when the income increased. Furthermore, contrary to the predictions of behavioral life-cycle theory, it was found that the respondents adjusted their propensity to consume the most when the income increases or decreases took place immediately. Hence, it is suggested that theories of intertemporal choice (e.g., Loewenstein, 1988; Loewenstein & Prelec, 1992) provide a better account of the data than does the behavioral lifecycle theory. (shrink)

A large part of our daily activities involves judging the psychological value of time. This study tested a previously less explored aspect about whether people are loss averse for time – i.e. do losses of time loom larger than corresponding gains? Using comparative hedonic judgments, the impact of prospective gains versus losses of time was examined for common contexts like waiting and local travel based on suggestions by typical navigation apps. The magnitude of time was varied without an explicit (...) reference point (experiment 1) and with a clear reference without any overt consequence (experiment 2). The contextual nature of outcome along with magnitude was also manipulated (experiment 3). Prospective gains loomed as larger or equal to losses for low magnitudes while there was a trend of losses to loom larger than gains only for high magnitudes of time. These results weaken the empirical evidence for loss aversion and highlight its magnitude-dependent nature thus presenting a nuanced perspective to the affective psychology of time. (shrink)

When making decisions, people tend to overweigh the impact of losses compared to gains, a phenomenon known as loss aversion. A moderate amount of LA may be adaptive as it is necessary for protecting oneself from danger. However, excessive LA may leave people few opportunities and ultimately lead to suboptimal outcomes. Despite frequent reports of elevated LA in specific populations such as patients with depression, little is known about what psychological characteristics are associated with the tendency of LA. (...) Based on the neurobiological studies of LA, we hypothesized that positive psychological wellbeing may be negatively associated with people's tendency of LA. In the present study, we set out to test this hypothesis in a sample of young adults. We evaluated LA using a decision-making task in which subjects were asked to decide whether to accept or reject a series of coin-toss gambles. Our results revealed that individuals with more advanced personal growth as assessed by the Ryff's Psychological Well-being Inventory showed reduced LA. To our knowledge, this is the first report demonstrating an association between positive psychological wellbeing and LA. These findings suggest that personal growth might be employed as interventional targets for correcting excessive LA in vulnerable populations. (shrink)

Prospect theory emerged as one of the leading descriptive decision theories that can rationalize a large body of behavioral regularities. The methods for eliciting prospect theory parameters, such as its value function and probability weighting, are invaluable tools in decision analysis. This paper presents a new simple method for eliciting prospect theory’s value function without any auxiliary/simplifying parametric assumptions. The method is applicable both to choice under ambiguity (Knightian uncertainty) and risk (when events are characterized by objective probabilities). Our new (...) elicitation method is implemented in a simple paper-and-pencil experiment (via an iterative multiple price list format). This is one of the first experiments that elicits non-parametric prospect theory’s value function with salient rewards. The collected data generally confirm findings in the existing literature: the value function is S-shaped (concave in the gain domain and convex in the loss domain) though there is a weaker loss aversion on the aggregate level and a substantial heterogeneity in loss aversion on the individual level (41% loss averse, 6% loss neutral and 53% gain seeking). (shrink)

We call a decision maker risk averse for losses if that decision maker is risk averse with respect to lotteries having alternatives below a given reference alternative in their support. A two-person bargaining solution is called invariant under risk aversion for losses if the assigned outcome does not change after correcting for risk aversion for losses with this outcome as pair of reference levels, provided that the disagreement point only changes proportionally. We present an axiomatic characterization of the (...) Nash bargaining solution based on this condition, and we also provide a decision-theoretic characterization of the concept of risk aversion for losses. (shrink)

While agreeing with the main conclusion of Dominic Wilkinson and colleagues (Wilkinson, Butcherine, and Savulescu 2019), namely, that there is no moral difference between treatment withholding and withdrawal as such, we wish to criticize their approach on the basis that it treats the widespread acceptance of withdrawal aversion (WA) as a cognitive bias. Wilkinson and colleagues understand WA as “a nonrational preference for withholding (WH) treatment over withdrawal (WD) of treatment” (22). They treat WA as a manifestation of (...) class='Hi'>loss aversion and refer to Kahneman and colleagues (1991), which defined this effect as follows: “the disutility of giving up an object is greater that the utility associated with acquiring it” (194). In a previous work, Wilkinson and Savulescu understood nonequivalence between treatment withholding and withdrawal as a reflection of slightly different, although related, phenomena: status quo bias or omission bias (Wilkinson and Savulescu 2012, 130–131). In neither of these two papers do they describe precisely the relation between these well-known psychological effects and WA, nor do they explain why they treat these effects as examples of nonrational preferences, despite the fact that these issues have been the subject of wide-ranging discussions on the intersection of psychology, economy, and philosophy. (shrink)

This study extends experimental tests of (cumulative) prospect theory (PT) over prospects with more than three outcomes and tests second-order stochastic dominance principles (Levy and Levy, Management Science 48:1334–1349, 2002; Baucells and Heukamp, Management Science 52:1409–1423, 2006). It considers choice behavior of people facing prospects of three different types: gain prospects (losing is not possible), loss prospects (gaining is not possible), and mixed prospects (both gaining and losing are possible). The data supports the distinction of risk behavior into these (...) three categories of prospects, Further, probability weighting and diminishing sensitivity of utility as predicted by PT are observed. Loss aversion is, however, less pronounced, except for choices where one prospect is degenerate. The data suggests that the probability of losing may be relevant for loss aversion. (shrink)

This article presents the results of a survey designed to test, with economically sophisticated participants, Ellsberg’s ambiguity aversion hypothesis, and Smithson’s conflict aversion hypothesis. Based on an original sample of 78 professional actuaries (all members of the French Institute of Actuaries), this article provides empirical evidence that ambiguity (i.e. uncertainty about the probability) affect insurers’ decision on pricing insurance. It first reveals that premiums are significantly higher for risks when there is ambiguity regarding the probability of the (...) class='Hi'>loss. Second, it shows that insurers are sensitive to sources of ambiguity. The participants indeed, charged a higher premium when ambiguity came from conflict and disagreement regarding the probability of the loss than when ambiguity came from imprecision (imprecise forecast about the probability of the loss). This research thus documents the presence of both ambiguity aversion and conflict aversion in the field of insurance, and discuses economic and psychological rationales for the observed behaviours. (shrink)

The research on the dark side of leadership is still in its infancy. We have contributed to this line of research by proposing that work alienation acts as an underlying mechanism through which aversive leadership results in reduced job performance. We further propose that psychological capital acts as an important personal resource that reduces the negative effects of aversive leadership in the form of work alienation. The proposed model gets its support from the conversation of resources theory given by Hobfoll (...) (1981) which suggests that stressful situation like an aversive leadership results in the loss of employee resources as a result of that he/she indulges in work alienation and shows poor job performance to retain back the lost resources. People with better personal resources in the form of psychological capital are better able to cope-up with the aversive leader behavior and make them able to avoid work alienation. It is a time-lagged study. The data for the current study was collected from 321 employees working in the service sector organizations, particularly universities, banks and telecom organizations, through personally administered questionnaires. The results supported the mediation and moderation hypothesis. Limitations and future research along with theoretical and practical implications are given at the end. (shrink)

After contrasting obscurantism with bullshit, we explore some ways in which obscurantism is typically justified by investigating a notorious test-case: defences of Lacanian psychoanalysis. Obscurantism abuses the reader's natural sense of curiosity and interpretive charity with the promise of deep and profound insights about a designated subject matter that is often vague or elusive. When the attempt to understand what the speaker means requires excessive hermeneutic efforts, interpreters are reluctant to halt their quest for meaning. We diagnose this as a (...) case of psychological loss aversion, in particular, the aversion to acknowledging that there was no hidden meaning after all, or that whatever meaning found was projected onto the text by the reader herself. (shrink)

Pepper & Nettle argue that the more present-oriented behavior associated with a low socioeconomic status is an adaptive response to having relatively little control over the future. However, a study of fasters during Ramadan shows that self-imposed deprivation, which carries no implications regarding the ability to realize deferred rewards, is associated with loss and risk aversion.

In the theoretical description of prospect theory, distinct sets of parameters can control the curvature of the value function and the shape of the probability weighting function. There is one for the gain domain and one for the loss domain. However, in most estimations, behaviour over losses is assumed to perfectly reflect behaviour over gains, through a unique set of parameters. We examine the consequences of relaxing this simplifying assumption in the context of Tanaka et al.’s (Am Econ Rev (...) 100(1):557–571, 2010) risk-elicitation procedure based on multiple price lists. We show that subjects’ behaviour for gains is mostly reflected for losses at the aggregate and individual levels, and is consistent with the distinctive prospect theory fourfold pattern. Reflection is only partial as the mean curvature of the value function is slightly less convex for losses than it is concave for gains. These results are robust to a high-stake context. However, we demonstrate that assuming reflection can have huge consequences on loss-aversion measures. Incidentally, we also highlight the existence of a strong, negative and persistent pure loss-frame effect on elicited loss aversion. We recommend that future practitioners and modellers are particularly cautious about the loss-aversion values they obtain or use because these are especially sensitive to parametric assumptions and framing. (shrink)

This paper examines Kahneman and Tversky’s standard explanation for preference reversal due to framing effects in the famous “Asian flu” case. It argues that, alongside with their “loss/no gain effect” account, an alternative interpretation, still consistent with the empirical data, amounts to a more reasonable psychological explanation for the preference reversal. Specifically, my hypothesis is that shifts in the baseline induce shifts in the agents’ classification of the same action as “doing harm” rather than “allowing harm to occur”, and (...) that people are risk-seeking when it comes to avoid causing extra deaths–doing harm–and risk-averse when it comes to preventing more deaths–by the means of allowing other deaths to occur as a side effect. I then survey the two most influential concurrent accounts in the moral literature, with respect to the relation between the loss/no gain and the doing/allowing distinction: Horowitz’s reductionist conclusion, which argues that the latter collapses into the former, and Kamm’s rebuttal, which claims instead that the two distinctions can be pulled apart. I eventually explain why my interpretation differs from both these positions. (shrink)

Although project failure is commonly considered a negative event, it can provide valuable resources for learning. Despite well documented research on the antecedents of learning from project failure at the individual level, individuals’ attitude toward failures, a relatively proximal antecedent of learning from failure, has attracted limited attention in organizational studies. To address this paucity of research, based on the sensemaking theory, in the current study we specifically focused on individuals’ failure aversion and explored how it would influence learning (...) from failure through the process of arguing and expectation. Using a sample of 774 employees from R&D teams in China, our findings revealed that individuals’ failure aversion enhanced their learning from failure through inducing a loss-focused coping, but failure aversion negatively affected learning from failure through increasing the individuals’ perceived loss of self-esteem. We also found that individuals’ learning goal orientation weakened the negative relationship between the loss of self-esteem and learning from failure; however, LGO did not moderate our hypothesized relationship between loss-focused coping and learning from failure. Our study extends the literature on learning from failure in two ways. First, it explores the learning from failure process at the individual level based on the sensemaking theory and second, it sheds light on the underlying cognitive mechanisms operating between failure aversion and learning from project failure. (shrink)

This article presents the results of an experiment that completely measures the utility function and probability weighting function for different positive and negative monetary outcomes, using a representative sample of N = 1,935 from the general public. The results confirm earlier findings in the lab, suggesting that utility is less pronounced than what is found in classical measurements where expected utility is assumed. Utility for losses is found to be convex, consistent with diminishing sensitivity, and the obtained loss-aversion (...) coefficient of 1.6 is moderate but in agreement with contemporary evidence. The estimated probability weighting functions have an inverse-S shape and they imply pessimism in both domains. These results show that probability weighting is also an important phenomenon in the general population. Women and lower educated individuals are found to be more risk averse, in agreement with common findings. In contrast to previous studies that ascribed gender differences in risk attitudes solely to differences in the degree utility curvature, however, our results show that this finding is primarily driven by loss aversion and, for women, also by a more pessimistic psychological response toward the probability of obtaining the best possible outcome. (shrink)

This article makes first use of a set of databases that are authoritative, independent, and consistent to examine an old research question: do firms hurt their financial performance by damaging stakeholder interests? The databases are US government on-line listings of fines for environmental breaches, unsafe workplaces, fraudulent accounting standards, and product recalls. These measures are assumed to proxy for signals to stakeholders of the environmental, social, and governance (ESG) risks in transacting with the firm and appear to have fewer biases (...) than conventional measures of stakeholder standards. Using a sample of all non-financial S& P 500 firms during the most recent 1998-2003 full cycle in the market, after controlling for firm-specific differences, sales margins of firms fell by 0.8% if they announced a product recall and by 0.4% if cited by OSHA for an unsafe workplace; and shareholder return was significantly reduced by an EPA or SEC prosecution. This study links the risk of transaction uncertainty, information signaling theory, and the resource-based view of the firm to company financial performance. Results support the normative assumption that a firm's sales margin will be damaged by unethical treatment of stakeholders as evidenced by ESG breaches, presumably because risk-averse customers and suppliers are alert to signals of counterparty risk. (shrink)

The present article aims to utilize some insights from behavioral and happiness economics to discuss the consequences that the introduction of an unconditional basic income to cope with technological unemployment may hold for well-being. The impact of 21st-century technological progress on employment has only just begun to make itself felt and it will take time to realize its full extent. However, the main innovation is already common knowledge: robots are finding their way into the production process. According to several recent (...) contributions, the phenomenon is radically different from past technological revolutions and could generate high levels of unemployment, calling for innovative redistributive public policies. The present article, building on Keynes’ short essay and referring to some of the principles and models of behavioral and happiness economics, focuses on the best-known of these policies, namely provision of an unconditional basic income. A series of factors – loss aversion and hedonic adaptation, the impossibility of escalating to higher-grade consumption behaviors, social interaction in the form of active and passive envy, loss of self-esteem and social stigma – are all likely to have a negative impact on well-being if an unconditional basic income that remains unchanging over time is implemented. A policy mix combining a rising basic income with other measures is therefore proposed. (shrink)

We provide an economic interpretation of the practice consisting in incorporating risk measures as constraints in an expected prospect maximization problem. For what we call the infimum of expectations class of risk measures, we show that if the decision maker (DM) maximizes the expectation of a random prospect under constraint that the risk measure is bounded above, he then behaves as a “generalized expected utility maximizer” in the following sense. The DM exhibits ambiguity with respect to a family of utility (...) functions defined on a larger set of decisions than the original one; he adopts pessimism and performs first a minimization of expected utility over this family, then performs a maximization over a new decisions set. This economic behaviour is called “maxmin under risk” and studied by Maccheroni (Econ Theory 19:823–831, 2002). As an application, we make the link between an expected prospect maximization problem, subject to conditional value-at-risk being less than a threshold value, and a non-expected utility economic formulation involving “loss aversion”-type utility functions. (shrink)

In the time of the COVID-19 pandemic, people are often faced with uncertain risky choice. Risky choice will be affected by different descriptions of the event’s gain or loss framework, this phenomenon is known as the framing effect. With the continuous expansion and in-depth study of frame effects in the field of risky choice, researchers have found that the are quite different in different situations. People have different interpretations of the same event at different psychological distances, and will also (...) be affected by their own emotions. Therefore, the current study examines the common influence of task frame, spatial distance, and trait emotion on risky choice through two studies. Study 1 used a 2 × 2 inter-subject design, and the dependent variable is the choice of the rescue plan for the classic “Asian disease” problem. The results revealed that trait anger did not predict individuals’ risky choice preferences, and high trait anxiety led individuals to be more risk-averse. The framing effect exists in risky choice, and individuals prefer risk seeking in the loss frame. Study 2 used a 2 × 2 × 2 three-factor inter-subject design in which the dependent variable is the choice of rescue plan. The results indicate that the framing effect also exists in risky choice, and individuals prefer risk seeking in a loss frame. High trait anxiety lead individuals to be more risk-averse, while trait anger has no significant predictive effect on risk preference. Distant spatial distance lead individuals to increase their preference for risk-seeking under the gain frame, which leads to the disappearance of the framing effect. In conclusion, trait anxiety and spatial distance have a certain degree of influence on risky choice under the framework of gain and loss. (shrink)

Prospect theory is increasingly used to explain deviations from the traditional paradigm of rational agents. Empirical support for prospect theory comes mainly from laboratory experiments using student samples. It is obviously important to know whether and to what extent this support generalizes to more naturally occurring circumstances. This article explores this question and measures prospect theory for a sample of private bankers and fund managers. We obtained clear support for prospect theory. Our financial professionals behaved according to prospect theory and (...) violated expected utility maximization. They were risk averse for gains and risk seeking for losses and their utility was concave for gains and convex for losses. They were also averse to losses, but less so than commonly observed in laboratory studies and assumed in behavioral finance. A substantial minority focused on gains and largely ignored losses, behavior reminiscent of what caused the current financial crisis. (shrink)

Recent work in the behavioral sciences asserts that we are subject to a variety of cognitive biases. For example, we mourn losses more than we prize equivalently sized gains; we are more inclined to believe something if it matches our previous beliefs; and we even relate more warmly or coldly to others depending on whether the coffee cup we are holding is warm or cold. Drawing on this work, case law and legal scholarship have asserted that we have reason to (...) select legal norms, or revise existing norms, so as to eliminate the influence of these and other cognitive biases. -/- In this Article, I critically evaluate whether and when this reaction is warranted. I begin by contrasting predominantly descriptive definitions of bias, on which bias is merely deviation from a predictive model, with prescriptive definition of bias, on which biased conduct is conduct that actors ought not do. I then similarly contrast the behavioral-scientific concepts of statistical significance and effect size with the concept of significance required to justify legal conclusions. -/- With this apparatus in place, I go on to consider a variety of examples where legal commentators and decisionmakers have worried about the effects of cognitive bias on law. I argue that many of these cognitive biases (for example, our aversion to losses), while reflecting deviations from behavioral scientists’ models of human behavior, are not normatively objectionable and so give us no reason to revise our legal norms to eliminate their effect. Others (e.g., the effect of judges’ hunger on their decisionmaking), however, constitute biases under both descriptive and prescriptive definitions and therefore give us good reason to revise our legal norms. -/- I conclude by contrasting my conclusion — that evaluation of cognitive biases’ legal significance must explicitly evaluate the normative arguments for and against the model of decisionmaking in question on a case-by-case basis — with the arguments of influential scientists and legal commentators like Daniel Kahneman and John Mikhail, who treat cognitive heuristics and biases as more broadly desirable or objectionable. (shrink)

We examined the effects of framing and order of presentation on professional philosophers’ judgments about a moral puzzle case (the “trolley problem”) and a version of the Tversky & Kahneman “Asian disease” scenario. Professional philosophers exhibited substantial framing effects and order effects, and were no less subject to such effects than was a comparison group of non-philosopher academic participants. Framing and order effects were not reduced by a forced delay during which participants were encouraged to consider “different variants of the (...) scenario or different ways of describing the case”. Nor were framing and order effects lower among participants reporting familiarity with the trolley problem or with loss-aversion framing effects, nor among those reporting having had a stable opinion on the issues before participating the experiment, nor among those reporting expertise on the very issues in question. Thus, for these scenario types, neither framing effects nor order effects appear to be reduced even by high levels of academic expertise. (shrink)

Two compelling principles, the Reasonable Range Principle and the Preservation of Irrelevant Evidence Principle, are necessary conditions that any response to peer disagreements ought to abide by. The Reasonable Range Principle maintains that a resolution to a peer disagreement should not fall outside the range of views expressed by the peers in their dispute, whereas the Preservation of Irrelevant Evidence Principle maintains that a resolution strategy should be able to preserve unanimous judgments of evidential irrelevance among the peers. No standard (...) Bayesian resolution strategy satisfies the PIE Principle, however, and we give a loss aversion argument in support of PIE and against Bayes. The theory of imprecise probability allows one to satisfy both principles, and we introduce the notion of a set-based credal judgment to frame and address a range of subtle issues that arise in peer disagreements. (shrink)

This article presents the results of an experiment that completely measures the utility function and probability weighting function for different positive and negative monetary outcomes, using a representative sample of N = 1,935 from the general public. The results confirm earlier findings in the lab, suggesting that utility is less pronounced than what is found in classical measurements where expected utility is assumed. Utility for losses is found to be convex, consistent with diminishing sensitivity, and the obtained loss-aversion (...) coefficient of 1.6 is moderate but in agreement with contemporary evidence. The estimated probability weighting functions have an inverse-S shape and they imply pessimism in both domains. These results show that probability weighting is also an important phenomenon in the general population. Women and lower educated individuals are found to be more risk averse, in agreement with common findings. In contrast to previous studies that ascribed gender differences in risk attitudes solely to differences in the degree utility curvature, however, our results show that this finding is primarily driven by loss aversion and, for women, also by a more pessimistic psychological response toward the probability of obtaining the best possible outcome. (shrink)

Much behavioral welfare economics assumes that expected utility theory does not accurately describe most human choice under risk. A substantial literature instead evaluates welfare consequences by taking cumulative prospect theory as the natural default alternative, at least where description is concerned. We present evidence, based on a review of previous literature and new experimental data, that the most empirically adequate hypothesis about human choice under risk is that it is heterogeneous, and that where EUT does not apply, more choice is (...) characterized by rank-dependent utility models than by CPT. Most of the apparently loss-averse choice behavior results from probability weighting rather than from direct disutility experienced when an outcome is framed as a loss against an idiosyncratic reference point. We then consider implications of this finding for methodological debates about how to model welfare effects of policies, and argue that abandonment of a dogmatic belief in CPT as the correct theory of risk human choice exposes a conceptual error that is widespread in behavioral welfare economics. We provide concluding reflections on second-order, philosophical issues around the grounding of normative commitments in policy-focused economics. (shrink)

Research into cognitive biases that impair human judgment has mostly been applied to the area of economic decision-making. Ethical decision-making has been comparatively neglected. Since ethical decisions often involve very high individual as well as collective stakes, analyzing how cognitive biases affect them can be expected to yield important results. In this theoretical article, we consider the ethical debate about cognitive enhancement and suggest a number of cognitive biases that are likely to affect moral intuitions and judgments about CE: status (...) quo bias, loss aversion, risk aversion, omission bias, scope insensitivity, nature bias, and optimistic bias. We find that there are more well-documented biases that are likely to cause irrational aversion to CE than biases in the opposite direction. This suggests that common attitudes about CE are predominantly negatively biased. Within this new perspective, we hope that subsequent research will be able to elaborate this hypothesis and develop effective de-biasing techniques that can help increase the rationality of the public CE debate and thus improve our ethical decision-making. (shrink)

Daniel Kahneman's book Thinking, Fast and Slow (2011) has had a worldwide impact. The book's insights are profound and have changed the thinking of both decision scientists and general audiences about how choices are made. Kahneman, however, claims that standard utility theory cannot explain these insights because it 1) lacks “reference points” from which gains and losses can be measured, 2) does not predict loss aversion, and 3) assumes preferences are stable (amid supposed counter evidence). These alleged failures (...) of utility theory are what led Kahneman and Tversky (1979, 1991) to develop prospect theory. This brief article shows that a close reading of Thinking, Fast and Slow reveals fundamental oversights in these criticisms. Not only does loss aversion arise naturally within utility theory for rational economic agents with stable preferences, but the very measurements of gains and losses rely directly upon reference points. Rather than overturning the insights of prospect theory, proper use of utility theory and its indifference curve representations reveals these behavioral insights and places them within the sturdier, longer- established framework of neoclassical microeconomic theory. (shrink)

Other-perspective taking, distancing, time discounting as well as risk and loss aversion highly affect decision-making. Even though they influence each other, so far these cognitive processes have been unrelated or only partly related to each other in neuroscience. This article proposes a philosophical interpretation of these cognitive processes that is elaborated in the updated theory of Adam Smith’s prudence. The UTSP is inspired by Smith’s account of prudence and is in line with the neuroscientific and behavioral studies on (...) OPT, distancing, time discounting as well as risk and loss aversion. The UTSP represents a framework aiming to interpret and connect these cognitive processes and providing a consistent and empirically sound account of a “Smithianly” prudent style of decision-making. The two pillars of the UTSP are the shift of perspective in space and time and loss aversion. On the basis of this theory, a normative updated theory of Smithian prudence is outlined. The latter is useful for moral philosophy for two reasons: firstly, according to preliminary evidence, it is effective in guiding the agent in decisional contexts in which her well-being is at stake and she can affect other people with her actions. Secondly, since the NUTSP is based on neuroscientific findings on decision-making, it has a sound empirical basis that prevents a source of alienation for the agent. (shrink)