Exploring the Nature of Loss Aversion

Eric Johnson, Simon Gaechter and Andreas Herrmann
Additional contact information
Eric Johnson: Columbia Business School, Columbia University
Simon Gaechter: University of Nottingham
Andreas Herrmann: Zentrum for Business Metrics, St.Gallen Universitaet
Authors registered in the RePEc Author Service: Simon Gächter ()

No 2006-02, Discussion Papers from The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham

Abstract: 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.

New Economics Papers: this item is included in nep-upt
Date: 2006-02
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Working Paper: Exploring the Nature of Loss Aversion (2006)
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