Since mugs were distributed randomly, there was no reason to assume that the utility of the mug would differ across groups. Economic theory asserts that prices for buyers and sellers should be approximately equal. Nonetheless, sellers wanted significantly more to give up their mugs than buyers were willing to pay. According to loss aversion, sellers view the exchange as a loss, and buyers perceive it as a gain. Losses loom larger than gains, so selling prices should exceed buying prices.
Hundreds of studies have used this paradigm and demonstrated that selling prices exceed buying prices. However, relatively few have tested the hedonic prediction implied by loss aversion in experimental markets. Mellers and Ritov [2010] asked sellers to imagine the pain of losing their mug. Buyers were asked to imagine the pleasure of getting a mug. If loss aversion described anticipated emotions as well as utilities, the pain of the imagined loss should be greater in magnitude than the pleasure of the imagined gain. Yet the opposite pattern emerged. The anticipated pleasure of the gain exceeded in magnitude the anticipated pain of the loss, [t[110] = 4.57], as shown in Fig. 4.
Figure 4. Anticipated emotions in experimental markets. Contrary to loss aversion, sellers’ pain of imagined losses is less intense than buyers’ pleasure of imagined gains. This effect could occur if buyers were surprised about gains and sellers expected losses.
Mellers and Ritov suggested that this pattern could occur if surprise influenced judged emotions. The absence of “hedonic” loss aversion—and perhaps even the reversal—as shown in Fig. 4, could occur if buyers thought that gains were surprising, and sellers thought that losses were expected. Decision affect theory predicts that, under these circumstances, pleasure would increase and pain would decrease, perhaps even reversing the pattern of loss aversion.
To test this hypothesis, Mellers and Ritov [2010] asked buyers and sellers to rate their surprise with their outcome and the alternative one [i.e., endowment or the absence of endowment]. Despite the equal odds, both buyers and sellers said that an endowment was more surprising than the absence of an endowment [5.1 and 3.0, respectively, on a scale of 1 [not at all surprising] to 7 [extremely surprising], [t[54] = 4.15]]. This result may have occurred because subjects are typically not given mugs to take home when they participate in experiments. The pattern was consistent with the predictions of decision affect theory. Even if the utilities in decision affect theory were loss averse [see Eq. 1], surprise reversed the relative magnitude of judged pleasure and pain.
Several researchers have examined the hedonic implications of loss aversion in nonmarket contexts, and results are mixed [see Harinck et al., 2007; Kermer et al., 2006; Liberman et al., 2005; Rozin and Royzman, 2001]. In a recent paper, McGraw et al. [2010] offered an explanation for the data. They suggested that when judging emotions, people naturally tend to use similar types of outcomes for comparison. Losses are compared to other losses and gains to other gains. Bipolar scales [anchored with “very happy” and “very unhappy” at the ends] have a natural zero point, and because of these natural comparisons, subjects may use the negative and positive sides of the scale differently. Pleasurable and painful ratings might not be comparable if people used different contexts for comparison.
McGraw et al. [2010] offered a method of judging pleasure and pain that encouraged direct comparison of gains and losses. With this procedure, people are asked to consider the pleasure of a gain and the pain of a loss. Then they are asked, “Which feeling is stronger?” McGraw et al. [2010] used this method with fair 50/50 gambles and stakes of $200. The majority of subjects said that the pain of the loss was more intense than the pleasure of the gain. But with bipolar ratings [used by Mellers and Ritov, 2010], McGraw et al. [2010] found that judged pleasure and pain were equal in magnitude.
By this account, the pattern of judged pleasure and pain found by Mellers and Ritov [2010] was due to the use of a bipolar response scale that did not force participants to directly compare gains to losses. To find out whether this method would reverse the pattern of loss aversion found by Mellers and Ritov [2010], Mellers and Berman [2012] asked buyers and sellers about their feelings using direct comparisons. Buyers and sellers were told, “We would like you to consider the emotional impact of two situations, A and B. In situation A: You did not get a mug. How much pleasure would you feel if you got one? In situation B: You got a mug, but had to give it up. How much pain would you feel if you had to give it up? In which situation would your feelings be stronger [not better or worse, but rather, more intense]? Situation A, Equal, or Situation B?” Participants who answered “Situation A” or “Situation B” were then asked to rate the intensity of the difference on a 5-point scale ranging from 1 = “very little” to 5 = “extremely.” Results were still inconsistent with loss aversion. Gains and losses were no different in their intensity. This leaves decision affect theory as the remaining account of why gains loomed larger than losses in the experimental markets.
To find out whether the direct comparison method suggested by McGraw et al. [2010] was sensitive to surprise effects, Mellers and Berman [2012] conducted another experiment in which people anticipated their feelings about the monetary outcomes of gambles. Outcomes were gains and losses of either $10 or $100, and the probabilities of winning were 10%, 50%, or 90%. Participants compared the pleasure of the gain to the pain of the loss and indicated which feeling was stronger. A follow-up question asked, “By how much?” Responses ranged from 1 = no difference to 5 = extremely different. Figure 5 shows the results.
Figure 5. Judged feelings about monetary outcomes of gambles using the direction comparison method suggested by McGraw et al. [2010], shown with $10 and $100 stakes. When the odds of winning are small [10%], gains are more intense than losses for $10 stakes and equal in magnitude for $100 stakes. When the odds of winning and losing are equal [50%] and when the odds of losing are small [90% chance of winning], losses are more intense than gains, consistent with loss aversion.
The relative intensity of pleasure and pain is plotted on the y axis for the six gambles with light gray bars for $10 and dark gray bars for $100 gambles. According to McGraw et al. [2010], direct comparisons should result in “hedonic” loss aversion; all bars should fall below the zero point, regardless of the probability of outcomes. With fair 50/50 gambles, Mellers and Berman [2012] were able to replicate the results of McGraw et al [2010]. Losses loomed larger than gains. But when the probabilities of winning were small, the relative magnitudes of pleasure and pain reversed. When gains were surprising [i.e., a 10% chance of winning], pleasure exceeded pain for the $10 gamble and pleasure was identical to pain for the $100 gamble. Figure 6 shows judged surprise for the outcomes of the gambles. Differences in surprise ratings [surprise of a gain − surprise of a loss] indicated that, when the probability of winning was 10%, gains were more surprising than losses for $10 and $100 gambles, and when the probability of losing was 10%, losses were more surprising than gains.
Figure 6. Judged surprise of outcomes. When the odds of winning are small [10%] or equal to the odds of losing [50%], gains are more surprising. When the odds of losing are small [90% chance of winning], losses are more surprising. This pattern of surprise could help explain judged feelings in Fig. 5 if surprising gains were more pleasurable than expected losses [on the left] and surprising losses were more painful than expected gains [on the right]. Loss aversion could appear with fair 50/50 gambles if loss aversion in the utilities outweighed surprise effects.
To summarize, surprise effects may have made the pleasure of a surprising gain of $10 exceed the pain of an expected $10 loss and the pleasure of a surprising gain of $100 equal in magnitude to the pain of an expected $100 loss, even when judgments were placed on a common continuum. Our results in Fig. 5 show that the relative magnitude of pleasure and pain is not fixed; it depends on the probabilities of occurrence. Surprise amplifies emotional experiences. The pleasure of a surprising gain can exceed the pain of an expected loss, and the pain of a surprising loss can be greater in magnitude than the pleasure of an expected gain.
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Decision Biases, Cognitive Psychology of
E. Shafir, in International Encyclopedia of the Social & Behavioral Sciences, 2001
3 Loss Aversion and the Status Quo Bias
A fundamental fact regarding people's reaction to outcomes is loss aversion: The loss of utility associated with giving up a good is greater than the utility associated with obtaining it [Tversky and Kahneman 1991]. An immediate implication of loss aversion is that people will not accept an even chance to win or lose $X, because the loss of $X is more aversive than the gain of $X is attractive. Indeed, people are generally willing to accept an even-chance prospect only when the gain is substantially greater than [about twice as large as] the loss. Loss aversion entails that the loss of utility associated with giving up a good that is in our possession is generally greater than the utility gain associated with obtaining that good. This yields ‘endowment effects,’ wherein the mere possession of a good [thus viewing it as a potential loss] can lead to higher valuation of it than if it were not in one's possession [Kahneman et al. 1990].
A closely related manifestation of loss aversion is a general reluctance to trade, which is illustrated in a study [Knetsch 1989] in which subjects were divided into two groups: Half of the subjects were given a decorated mug, and the others were given a large bar of Swiss chocolate. Later, each subject was shown the alternative gift, and offered the opportunity to trade their gift for the other. Because the initial allocation of gifts was arbitrary and transaction costs minimal, economic theory predicts that about half the subjects should exchange their gifts. On the other hand, if losses loom larger than gains, then most participants will be reluctant to give up the gift in their possession [a loss] in order to obtain the other [a gain]. Indeed, only 10 percent of the participants chose to trade their gifts. This contrasts sharply with the 50 percent predicted by standard economic analysis in which the value of a good does not change when it becomes part of one's endowment.
Loss aversion entails a strong tendency to maintain the status quo, because the disadvantages of departing from it loom larger than the advantages of its alternative [Samuelson and Zeckhauser 1988]. A striking framing effect which relies on people's tendency to maintain the status quo has been observed in the context of insurance decisions, when New Jersey and Pennsylvania both introduced the option of a limited right to sue, which entitles automobile drivers to lower insurance rates. The two states differed, however, in what they offered consumers as the default option. New Jersey motorists had to acquire the full right to sue [transaction costs were minimal: a signature], whereas in Pennsylvania the full right to sue was the default. Presented with the choice, only about 20 percent of New Jersey drivers chose to acquire the full right to sue, while approximately 75 percent of Pennsylvania drivers chose to retain it. The difference in adoption rates due to the different frames had financial repercussions estimated at around $200 million dollars [Johnson et al. 1993].
Loss aversion promotes stability rather than change by inducing people to maintain their current position. Among other things, the reluctance to change induced by loss aversion can hinder the negotiated resolution of disputes. If each side to a dispute evaluates the opponent's concessions as gains and its own concessions as losses, then agreement will be hard to reach because each side will perceive itself as relinquishing more than it stands to gain.
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The Neurobiology of Context-Dependent Valuation and Choice
Kenway Louie, Benedetto De Martino, in Neuroeconomics [Second Edition], 2014
Loss Aversion
Recent research [see Chapter 3 and the Appendix] has begun to investigate the neurobiological mechanism underlying loss aversion. In one fMRI neuroimaging study, subjects were presented with a series of mixed gambles that offered a 50/50 chance to either gain or lose a given amount of money [Tom et al., 2007]. Potential gains [ranging between $10 to $40, in $2 increments] and potential losses [ranging between −$20 to −$5, in $1 increments] were presented independently and subjects were required to either accept or reject each proposed gamble.
Individual behavioral loss aversion λ was computed as the ratio of the [absolute] loss response to the gain response, which yielded a median λ=1.93 across all subjects, a degree of loss aversion consistent with many previous studies. The values of the potential gains and losses were entered into a regression analysis to identify brain areas showing a parametric response to increasing magnitude of either losses or gains. Activity encoding potential reward, increasing with the magnitude of potential gains, were found in regions including the striatum, OFC, and dopaminergic midbrain regions. Consistent with the computation of the net gamble value, potential losses were coded as decreased signal by the same network. Critically, while the net value signal was monotonic, it was asymmetric between the parametric estimates for gains and losses. This asymmetry in the neural estimates in striatum for gains and losses [called “neural loss aversion”] correlates with well-documented asymmetry in behavioral loss aversion. An important question is how this neural asymmetry in net gamble value emerges, a point not yet resolved [DeMartino et al., 2010].
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Behavioral Economics
N.S. Grewal, ... E. Moses, in Encyclopedia of Mental Health [Second Edition], 2016
Loss aversion and the endowment effect
Two key principles deriving from Prospect Theory, and used as evidence for reference-dependent preferences, are loss aversion and the endowment effect [Kahneman et al., 1991]. Loss aversion reflects a person’s preference to prefer avoiding losses to acquiring gains. The endowment effect is a manifestation of loss aversion, wherein people place extra value on goods they own compared to identical goods they do not own. In other words, the value of a good increases once a person establishes his or her property right over it. In the original endowment effect experiment [Kahneman et al., 1990], students demanded a higher price for a mug that had been given to them but put a lower price on a mug they did not yet own – when the actual price of each mug was identical. The endowment effect has been described as an anomaly in neoclassical theory, which predicts that a person’s willingness to pay [WTP] for a good should be equivalent to their willingness to accept [WTA] payment to be deprived of the same good. In other words, valuation should not be affected by ownership. In reality, as the endowment effect demonstrates, references points [as predicted by the Prospect Theory value function] do influence valuations and decisions and can result in WTA being greater than WTP.
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Approach/Avoidance
Neil McNaughton, ... Philip J. Corr, in Neuroimaging Personality, Social Cognition, and Character, 2016
4 From Basics to States and Traits: Assessing Approach, Avoidance, and Goal Conflict
Our analysis of the basics of approach, avoidance, and goal conflict shows that care must be exercised when using complex combinations of motivational stimuli and complex paradigms. Variations in valuation, such as loss aversion, differential effects of approach and avoidance gradients, direct interactions between approach and avoidance systems, and the asymmetric impact of goal conflict on avoidance relative to approach, must all be taken into account when interpreting many of the paradigms currently used. However, in principle, state analysis of these systems is straightforward.
One simplifying step is to use money as the source of motivation. Organizations that find work for students and other casual workers can supply participants with a hunger for money sufficient to make them willing to work for the local minimum wage. Importantly, loss of money from an existing store can then be used as a motivator, with the knowledge that its external value is the same as the gain of the same amount of money used as a positive motivator. As shown in Figure 3, gain and loss can be presented or omitted to generate approach or avoidance. The amounts of gain and loss can then be varied parametrically to allow mathematical extraction, separately, of the contribution of gain/loss sensitivity differences and of approach/avoidance sensitivity differences. Using these methods, loss aversion and approach preference have been demonstrated.188
For neuroimaging, it is also important to use designs that allow the calculation of appropriate contrasts. If one wishes to image goal conflict activation, one must accept that gain, loss, approach, avoidance, and other systems will all necessarily be activated when approach-avoidance conflict is being generated. To deal with this requires the use of at least three conditions. For example, with conditions that deliver two alternatives with a 50% probability on any trial, one could have: [1] net gain [−10c, +20c]; [2] conflict [−15c, +15c]; and [3] net loss [−20c, +10c]. A contrast of neuroimaging activation in condition 2 against the average of condition 1 and condition 3 would assess goal conflict-specific activation while eliminating the effects of external value [15c = [10c+20c]/2] and controlling for effects of factors such as risk. In practice, because of loss aversion, to statistically eliminate the effects of gain, loss, approach, and avoidance, when assessing conflict, one would need the ratio of gain/loss amounts tailored to each individual’s degree of loss aversion. Additional conditions would allow the separation of the effects of gain from the effects of loss and effects of approach from the effects of avoidance.188
For those interested in goal gradients [Figures 2 and 4], existing virtual reality maze paradigms [see Section 2.2] or even simpler runway analogues could be used. These have already demonstrated effects related to distance from a “predator,” as well as differences between simple anticipation of shock and the response to actual shock delivery. Combined with the presentation of money [to selected money-hungry participants], these virtual reality paradigms allow manipulation of the full gamut of parameters that have previously been used in animal behavior tests.
It is tempting, in the imaging of personality, to select questionnaires that have been designed, in theory, to tap into specific neurobiological functions [e.g., scales purporting to measure Gray’s Behavioral Inhibition System] but that have not in fact been neurobiologically validated. However, as we noted earlier, the nascent neuroscience of personality should not assume the very hypotheses that need to be tested. Psychologists’ presuppositions about which neural systems are responsible for any given trait, as measured by a questionnaire, may well be wrong. With approach, avoidance, and conflict, we are dealing with primordial biological systems whose elements have evolved to fulfill system-specific purposes. The state activation of these systems can be, and has been, assessed directly, with specific components extractable through appropriate contrasts. These specific components of neural state activation provide, we would argue, the best basis both for assessing personality-related variation in activation and for deriving questionnaire scales or other measures of approach, avoidance, and goal conflict traits, using the criterion approach described in Section 3. How the sensitivities of the approach, avoidance, behavioral inhibition, and other neural systems give rise to variation in traits is the key question that the field must strive to solve. A genuinely neuroscientific approach will provide a solid basis for future attempts to understand the contribution of these fundamental neural systems to traits such as extraversion, neuroticism, impulsivity, and others.
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Decision Making
Cleotilde Gonzalez, in Progress in Brain Research, 2013
8.2 More risk seeking in losses compared to gain domains
A common effect widely discussed in decisions from description implies that the subjective enjoyment from gaining a certain amount tends to be less than the subjective pain from losing the same amount [Kahneman and Tversky, 1979]. Some researchers have demonstrated that loss aversion does not hold in decisions from experience, where decision makers seem indifferent between an equal chance of gaining or losing the same amount [Erev et al., 2008; Ert and Erev, 2011]. In decisions from description, decision makers are risk averse in the gain domain and risk seeking in the loss domain [Kahneman and Tversky, 1979], and this pattern may reverse or disappear in decisions from experience [Erev and Barron, 2005].
Although much work needs to be done in regards to the differences between gains and losses in decisions from experience, our initial analyses of decisions from experience in the sampling paradigm of the TPT indicate no difference in risky behavior between gains and losses [χ2 = 0.308, p = 0.580]. The IBL model, however, predicts a difference between gains and losses, which although small, it is significant [χ2 = 12.462, p