Development of an Individual Measure of Loss Aversion John W. Payne (Duke) Suzanne B. Shu (UCLA and NBER) Elizabeth C. Webb (Columbia)* Namika Sagara (Duke) Overview Development of a model-free individual-level measure of loss aversion 3 Oct 2015ACR Conference 20152 Overview Development of a model-free individual-level measure of loss aversion How loss aversion measure correlates with other individual- level measures 3 Oct 2015ACR Conference 20153 Overview Development of a model-free individual-level measure of loss aversion How loss aversion measure correlates with other individual- level measures Whether loss aversion measure is predictive of consumer behavior 3 Oct 2015ACR Conference 20154 Overview Development of a model-free individual-level measure of loss aversion How loss aversion measure correlates with other individual- level measures Whether loss aversion measure is predictive of consumer behavior 3 Oct 2015ACR Conference Tested on over 6,600 respondents across six studies Development of the Loss Aversion Measure Existing Approaches 3 Oct 2015ACR Conference 20156 Development of the Loss Aversion Measure Existing Approaches Assume an underlying model of decisions over risk 3 Oct 2015ACR Conference Kahneman & Tversky, 1979; Tversky & Kahneman, 1992; Toubia et al., 2013 Development of the Loss Aversion Measure Existing Approaches Assume an underlying model of decisions over risk Use 50:50 two-outcome gambles 3 Oct 2015ACR Conference Kahneman & Tversky, 1979; Tversky & Kahneman, 1992; Toubia et al., 2013 Development of the Loss Aversion Measure Existing Approaches Assume an underlying model of decisions over risk Use 50:50 two-outcome gambles Our Approach 3 Oct 2015ACR Conference Kahneman & Tversky, 1979; Tversky & Kahneman, 1992; Toubia et al., 2013 Development of the Loss Aversion Measure Existing Approaches Assume an underlying model of decisions over risk Use 50:50 two-outcome gambles Our Approach Model-free 3 Oct 2015ACR Conference Kahneman & Tversky, 1979; Tversky & Kahneman, 1992; Toubia et al., 2013 Development of the Loss Aversion Measure Existing Approaches Assume an underlying model of decisions over risk Use 50:50 two-outcome gambles Our Approach Model-free Slightly more complex, mixed three-outcome gambles 3 Oct 2015ACR Conference Kahneman & Tversky, 1979; Tversky & Kahneman, 1992; Toubia et al., 2013 Brooks & Zank, 2005 Development of the Loss Aversion Measure 3 Oct 2015ACR Conference Development of the Loss Aversion Measure 3 Oct 2015ACR Conference Participants are asked to choose between two gambles in each step 1 2 3 Development of the Loss Aversion Measure 3 Oct 2015ACR Conference Participants are asked to choose between two gambles in each step One gamble in the pair is always the more loss averse choice 1 2 3 Development of the Loss Aversion Measure 3 Oct 2015ACR Conference % 58% 44% Most respondents express some degree of loss aversion by preferring a loss-averse gamble to a matched gain- seeking gamble Development of the Loss Aversion Measure 3 Oct 2015ACR Conference Participants are asked to choose between two gambles in each step One gamble in the pair is always the more loss averse choice Yields an overall measure of loss aversion per participant 1 2 3 The Studies 3 Oct 2015ACR Conference Study 1 N = % female, M age = 50.5 Study 2 N = 1, % female, M age = 44.3 Study 3 N = 1, % female, M age = 53.1 Study 4 N = 1, % female, M age = 53.3 Study 5 N = 1, % female, M age = 57.4 Study 6 N = % female, M age = 35.1 The Studies 3 Oct 2015ACR Conference Study 1 N = % female, M age = 50.5 Study 2 N = 1, % female, M age = 44.3 Study 3 N = 1, % female, M age = 53.1 Study 4 N = 1, % female, M age = 53.3 Study 5 N = 1, % female, M age = 57.4 Study 6 N = % female, M age = 35.1 Across Studies N = 6,670 The Studies 3 Oct 2015ACR Conference Study 1 N = % female, M age = 50.5 Study 2 N = 1, % female, M age = 44.3 Study 3 N = 1, % female, M age = 53.1 Study 4 N = 1, % female, M age = 53.3 Study 5 N = 1, % female, M age = 57.4 Study 6 N = % female, M age = 35.1 Across Studies N = 6,670 Demographic Variables -Age -Expected Age (Life Expectancy) -Gender -Subjective Health The Studies 3 Oct 2015ACR Conference Study 1 N = % female, M age = 50.5 Study 2 N = 1, % female, M age = 44.3 Study 3 N = 1, % female, M age = 53.1 Study 4 N = 1, % female, M age = 53.3 Study 5 N = 1, % female, M age = 57.4 Study 6 N = % female, M age = 35.1 Across Studies N = 6,670 Demographic Variables -Age -Expected Age (Life Expectancy) -Gender -Subjective Health Other Variables -Social Security Solvency -Intertemporal Patience -Retirement Savings (Behaviors) Results: Loss Aversion Measure, By Study (Raw Score) 3 Oct 2015ACR Conference Results: Loss Aversion Measure, By Study (Raw Score) 3 Oct 2015ACR Conference Results: Loss Aversion Measure, Across Studies 2 6 3 Oct 2015ACR Conference Results: Loss Aversion Measure, Across Studies 2 6 3 Oct 2015ACR Conference Loss aversion measure is relatively normally distributed no clustering at either end of the scale Results: Lambda Across Studies Oct 2015ACR Conference Results: Lambda Across Studies Oct 2015ACR Conference Average lambda across studies is 2.16 Results: Lambda Across Studies Oct 2015ACR Conference The lambda coefficient shows a jump from lambdas below one (loss-seeking) to lambdas above one (loss aversion) Correlates of Loss Aversion Loss Aversion (1)(2)(3) Std Age (0.02)(0.03)(0.10) Std Expected Age -0.14***-0.10***-0.21** (0.02)(0.03)(0.07) Gender -0.43***-0.38***-0.53*** (0 = Female, 1 = Male) (0.05)(0.06)(0.11) Savings (0.01) SSA Exist (0.001) (0.003) Intertemporal Choice -0.11***-0.08 (0.03)(0.07) Health (0.05) N 5,8634,3051,016 3 Oct 2015ACR Conference * p < 0.05, ** p < 0.01, *** p < 0.001 Correlates of Loss Aversion Loss Aversion (1)(2)(3) Std Age (0.02)(0.03)(0.10) Std Expected Age -0.14***-0.10***-0.21** (0.02)(0.03)(0.07) Gender -0.43***-0.38***-0.53*** (0 = Female, 1 = Male) (0.05)(0.06)(0.11) Savings (0.01) SSA Exist (0.001) (0.003) Intertemporal Choice -0.11***-0.08 (0.03)(0.07) Health (0.05) N 5,8634,3051,016 3 Oct 2015ACR Conference * p < 0.05, ** p < 0.01, *** p < 0.001 Loss Aversion Measure, by Gender 3 Oct 2015ACR Conference Males are less loss averse than females (p