Michael Cameron: Meta loss aversion

Diagram of Prospect theory

Back in August, this article in The Conversation pointed me to this article by David Gal (University of Illinois at Chicago) and Derek Rucker (Northwestern), published in the Journal of Consumer Psychology (sorry I don’t see an ungated version anywhere). Loss aversion is the idea that people value losses much more than equivalent gains (in other words, we like to avoid losses much more than we like to capture equivalent gains). It is a central and defining idea in behavioural economics. In their article, Gal and Rucker present evidence that loss aversion is not real:

In sum, an evaluation of the literature suggests little evidence to support loss aversion as a general principle. This appears true regardless of whether one represents loss aversion in the strong or weak forms presented here. That is, a strong form suggests that, for loss aversion to be taken as a general principle, one should observe losses to generally outweigh gains and for gains to never outweigh losses. The weak form, as we have represented it, might simply be that, on balance, it is more common for losses to loom larger than gains than vice versa. This is not to say that losses never loom larger than gains. Yes, contexts exist for which losses might have more psychological impact than gains. But, so do contexts and stimuli exist where gains have more impact than losses, and where losses and gains have similar impact.

From what I can see Gal and Rucker’s argument rests on a fairly selective review of the literature, and in some cases I’m not convinced. A key aspect of loss aversion is that people make decisions in relation to a reference point, and it is comparison with that reference point that determines whether they are facing a loss or a gain. Gal and Rucker even recognise this:

For example, one individual who obtained $5 might view the $5 as a gain, whereas another individual that expected to obtain $10, but only obtained $5, might view the $5 obtained as a loss of $5 relative to his expectation…

It isn’t clear to me that the following evidence actually takes account of the reference point:

The retention paradigm involves a comparison of participants’ [willingness-to-pay] to obtain an object (WTP-Obtain) to a condition where participants are asked their maximum willingness-to-pay to retain an object they own (WTP-Retain). The retention paradigm and its core feature—the WTP-retain condition— proposes to offer a less confounded test of the relative impact of losses versus gains…

…in the discrete variant of the retention paradigm, both the decision to retain one’s endowed option and the decision to exchange the endowed option for an alternative are framed as action alternatives. In particular, participants in one condition are informed that they own one good and are asked which of two options they would prefer, either (a) receiving $0 [i.e., the retention option], or (b) exchanging their endowed good for an alternative good. Participants in a second condition are offered the same choice except the endowed good and the alternative good are swapped.

It seems to me that in both the endowed option (where the research participant is paying to retain something they have been given) and the alternative option (where the research participant is paying to obtain that same item), the reference point is not having the item. So, it isn’t a surprised when Gal and Rucker report that, in some of their earlier research:

Gal and Rucker (2017a) find across multiple experiments with a wide range of objects (e.g., mugs and notebooks; mobile phones; high-speed Internet, and train services) that WTP-Retain did not typically exceed WTP-Obtain. In fact, in most cases, little difference between WTP-Retain and WTP-Obtain was observed, and for mundane goods, WTP-Obtain exceeded WTP-Retain more often than not.

An interesting aspect of Gal and Rucker’s paper is that they try to explain why, in the face of the competing evidence they have accumulated, loss aversion is so widely accepted across many disciplines (including economics, psychology, law, marketing, finance, etc.). They adopt a Kuhnian argument:

Kuhn (1962) argues that as a paradigm becomes entrenched, it increasingly resists change. When an anomaly is ultimately identified that cannot easily be ignored, scientists will try to tweak their models rather than upend the paradigm. They “will devise numerous articulations and ad hoc modifications of their theory in order to eliminate any apparent conflict” (Kuhn, 1970, p. 78).

I want to suggest an alternative (similar to an earlier post I wrote about ideology). Perhaps academics are willing to retain their belief in loss aversion because, if they gave up on it, they would keenly feel its loss? Are academics so loss averse that they are unwilling to give up on loss aversion? If that’s the case, is that evidence in favour of loss aversion? It’s all getting rather circular, isn’t it?

Originally posted in Sex, Drugs, and Economics

The opinions expressed in this blog represent the opinions of the author and not those of Massey University or eSocSci except when they do not express the opinions of the author in the example of a quotation within the post. Read more. This post can be cited using this method and is reposted under Creative Commons 3.0 licensing permissions.

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