One of the best known implications
of prospect theory (Kahneman & Tversky, 1979) is the assertion that “losses
loom larger than gains.” Surprisingly, however, direct experimental evidence of
this assertion is hard to find. The current dissertation contains a direct
empirical evaluation of the loss aversion assertion in two main environments
where it was suggested to drive behavior. The evaluation starts with empirical
examination of loss aversion in description-based decisions (one shot decisions
under risk as studied by Kahneman & Tversky, 1979). In several studies that
evaluated such decisions no evidence was found for loss aversion. Moreover, an
estimation of the Prospect theory model on the current data suggests that the
loss aversion assumption is unnecessary to capture the main trends. The results
also document a strong format effect: the tendency of people to reject risky
gambles is observed only when these gambles are suggested as alternatives to
the status quo.
The second part
of the dissertation focuses on decisions from experience (repeated choice tasks
under uncertainty as studied by Thaler, Tversky, Kahneman, & Schwartz,
1997). The analysis suggests that Thaler et al's (1997) abstraction of loss
aversion is oversimplified. Specifically it neglects other plausible reference
point behavioral regularities (e.g., diminishing sensitivity to payoff
increments) that seem to facilitate behavior in this environment. Indeed,
previous findings that were interpreted as supporting evidence for loss
aversion are better captured with assumption of a strong diminishing
sensitivity to the payoffs magnitude. Another oversimplification involve Thaler
et al's (1997) abstraction of the stock market that reflects choice among
different assets (stocks and bonds) as a binary choice between two classes.
The current analysis refutes this assumption by showing that the generalization
from binary choice to multiple alternatives is not trivial and might lead to
systematic biases. The dissertation concludes with evaluating the apparent
inconsistency between the current results and the assertion that the
individuals are consistent in the relative weight they assign to gains and losses.
The results suggest that individuals may exhibit consistency in their
sensitivity to gains and losses only when they are given an opportunity to
eliminate the risk of losing.
