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2002•RePEc: Research Papers in EconomicsRequires access

What is Loss Aversion

Ulrich Schmidt, Horst Zank

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Abstract

Abstract. A behavioral definition of loss aversion is proposed and its impli-cations for original and cumulative prospect theory is analyzed. Original prospect theory is in agreement with the new loss aversion condition, and there utility is capturing all effects of loss aversion. In cumulative prospect theory loss aversion is captured by both, the weighting functions and the utility function. Further, some restrictions apply for the weighting functions involved in the latter model.

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Abstract. A behavioral definition of loss aversion is proposed and its impli-cations for original and cumulative prospect theory is analyzed. Original prospect theory is in agreement with the new loss aversion condition, and there utility is capturing all effects of loss aversion. In cumulative prospect theory loss aversion is captured by both, the weighting functions and the utility function. Further, some restrictions apply for the weighting functions involved in the latter model.

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Available abstract

Abstract. A behavioral definition of loss aversion is proposed and its impli-cations for original and cumulative prospect theory is analyzed. Original prospect theory is in agreement with the new loss aversion condition, and there utility is capturing all effects of loss aversion. In cumulative prospect theory loss aversion is captured by both, the weighting functions and the utility function. Further, some restrictions apply for the weighting functions involved in the latter model.

Key concepts: Loss aversion, Prospect theory, Cumulative prospect theory, Weighting, Economics, Risk aversion (psychology), Behavioral economics, Expected utility hypothesis

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