On Loss Aversion, Level-1 Reasoning, and Betting

Ido Erev (), Sharon Gilat-Yihyie (), Davide Marchiori () and Doron Sonsino ()
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Ido Erev: Faculty of Industrial Engineering and Management, Technion
Sharon Gilat-Yihyie: Department of Psychology, Western Galilee College
Davide Marchiori: Department of Management, Università Ca' Foscari Venezia

No 2, Working Papers from Venice School of Management - Department of Management, Università Ca' Foscari Venezia

Abstract: Previous research suggests that human reaction to risky opportunities reflects two contradicting biases: Òloss aversion", and Òlimited 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.

Keywords: Loss aversion; Level-1 reasoning; SamuelsonÕs Colleague; acquiring a company problem; market for lemons (search for similar items in EconPapers)
JEL-codes: C63 C73 D03 D82 D83 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2013-04
New Economics Papers: this item is included in nep-cbe and nep-exp
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Related works:
Journal Article: On loss aversion, level-1 reasoning, and betting (2015)
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