A behavioral definition of loss aversion

•This paper introduces a new behavioral definition of loss aversion.•Disliking of mixed acts with symmetric certainty equivalents of gain/loss parts.•New definition of loss aversion implies that losses loom larger than gains.•New definition of loss aversion is unrelated to non-linear probability wei...

Full description

Saved in:
Bibliographic Details
Published inEconomics letters Vol. 235; p. 111555
Main Author Blavatskyy, Pavlo R
Format Journal Article
LanguageEnglish
Published Elsevier B.V 01.02.2024
Subjects
Behavioral economics
Loss aversion
Prospect theory
Risk
Uncertainty (Ambiguity)
Risk
Prospect theory
D89
Uncertainty (Ambiguity)
Behavioral economics
Loss aversion
Online AccessGet full text

Cover

More Information
Summary:•This paper introduces a new behavioral definition of loss aversion.•Disliking of mixed acts with symmetric certainty equivalents of gain/loss parts.•New definition of loss aversion implies that losses loom larger than gains.•New definition of loss aversion is unrelated to non-linear probability weighting.•New definition of loss aversion is applicable to Knightian uncertainty (ambiguity). 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. [Display omitted]
ISSN:0165-1765
1873-7374
DOI:10.1016/j.econlet.2024.111555