On loss aversion, level-1 reasoning, and betting

Ido Erev (), Sharon Gilat-Yihyie, Davide Marchiori and Doron Sonsino ()

International Journal of Game Theory, 2015, vol. 44, issue 1, 113-133

Abstract: Previous research suggests that human reaction to risky opportunities reflects two contradicting biases: “loss aversion”, and “limited level of reasoning” that leads to overconfidence. Rejection of attractive gambles is explained by loss aversion, while counterproductive risk seeking is attributed to limited level of reasoning. The current research highlights a shortcoming of this popular (but often implicit) “contradicting biases” assertion. Studies of “negative-sum betting games” reveal high rate of counterproductive betting even when limited level of reasoning and loss aversion imply no betting. The results reflect two reasons for the high betting rate: initial tendency to participate and slow learning. Under certain conditions, the observed betting rate was higher than the rate predicted under random choice even after 250 trials with immediate feedback. These results can be captured with a model that assumes a tendency to select strategies that have led to good outcomes in a small set of similar past experiences, and allows for an initial framing effect. Copyright Springer-Verlag Berlin Heidelberg 2015

Keywords: Loss aversion; Level-1 reasoning; Samuelson’s Colleague; Acquiring a company problem; Market for lemons; C63; C73; D03; D82; D83 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://hdl.handle.net/10.1007/s00182-014-0421-2 (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: On Loss Aversion, Level-1 Reasoning, and Betting (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:jogath:v:44:y:2015:i:1:p:113-133

Ordering information: This journal article can be ordered from
http://www.springer. ... eory/journal/182/PS2

DOI: 10.1007/s00182-014-0421-2

Access Statistics for this article

International Journal of Game Theory is currently edited by Shmuel Zamir, Vijay Krishna and Bernhard von Stengel

More articles in International Journal of Game Theory from Springer, Game Theory Society
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().