When Do Losses Loom Larger Than Gains?

Abstract (Via Predictably Irrational)

In defining limits to loss aversion, Novemsky and Kahneman (2005) offer important new data and a needed summary of appropriate ways to think about loss aversion. In this comment to Novemsky and Kahneman’s article, the authors consider the new empirical results that involve probabilistic buying and selling, suggesting caution in generalizing the results to nonprobabilistic commerce. The authors expand Novemsky and Kahneman’s summary by exploring two critical constructs that help define the boundaries of loss aversion: emotional attachment and cognitive perspective. Emotional attachment alters loss aversion by moderating the degree to which parting with an item involves a loss, whereas shifts in cognitive perspective explain why items typically viewed as a loss are given more or less weight. The goal is to use these constructs to characterize more specifically contexts in which losses loom larger than gains and to suggest specific ways that research into loss aversion could evolve.

Introduction

In defining limits to loss aversion, Novemsky and Kahneman (2005) offer important new data and a needed summary of appropriate ways to think about loss aversion. In this comment to Novemsky and Kahneman’s article, the authors consider the new empirical results that involve probabilistic buying and selling, suggesting caution in generalizing the results to nonprobabilistic commerce. The authors expand Novemsky and Kahneman’s summary by exploring two critical constructs that help define the boundaries of loss aversion: emotional attachment and cognitive perspective. Emotional attachment alters loss aversion by moderating the degree to which parting with an item involves a loss, whereas shifts in cognitive perspective explain why items typically viewed as a loss are given more or less weight. The goal is to use these constructs to characterize more specifically contexts in which losses loom larger than gains and to suggest specific ways that research into loss aversion could evolve.

Excerpts

Finally, it is important to observe that research on the endowment effect has tended to focus on small and rather meaningless goods. The appeal of these is obvious—simplicity, cost, and manipulability. At the same time, the possibility of a better theoretical understanding of the endowment effect should encourage the examination of products, services, and rights about which people substantially care.

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01. July 2009 by Miguel Barbosa
Categories: Behavioral Economics, Curated Readings | Leave a comment

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