A behavioral definition of loss aversion

Pavlo R Blavatskyy

Economics Letters, 2024, vol. 235, issue C

Abstract: Loss aversion is one of the most important concepts in behavioral economics overcoming descriptive limitations of neoclassical risk aversion. Initially defined as disliking of symmetric 50%-50% bets, loss aversion implies that losses loom larger than gains under original prospect theory as well as many other decision theories but not under cumulative prospect theory (where probabilities of gains and losses are weighted differently). This paper proposes a minor modification of the definition of loss aversion as disliking of mixed lotteries that have symmetric certainty equivalents of their gain and loss parts. This behavioral definition works under cumulative prospect theory and ambiguity.

Keywords: Loss aversion; Prospect theory; Risk; Uncertainty (Ambiguity); Behavioral economics (search for similar items in EconPapers)
JEL-codes: D89 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:235:y:2024:i:c:s0165176524000399

DOI: 10.1016/j.econlet.2024.111555

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