Loss aversion in a consumption–savings model

Bowman, David; Minehart, Deborah; Rabin, Matthew

doi:10.1016/s0167-2681(99)00004-9

Cited by 307 publications

(241 citation statements)

References 31 publications

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“…The findings of this paper, particularly the result that many people set reference points in dynamic choice tasks, are of interest for researchers who incorporate behavioral heterogeneity into models of dynamic choice behavior. They are relevant for recent theoretical and applied research in, e.g., decision theory and marketing science (Zwick et al, 2003), labor economics (Eckstein and van den Berg, 2007), finance (Gneezy, 2005;Baucells, 2007), and life-cycle theory (Bowman et al, 1999). …”

Section: Discussionmentioning

confidence: 99%

“…Finally, since little is known about reference point formation over time in dynamically risky decision situations, my findings are relevant for numerous theoretical and applied issues in finance, e.g. when it comes to stock selling decisions (Baucells et al, 2007;Gneezy, 2005;Grinblatt and Han, 2005), as well as for life-cycle savings decisions (Bowman et al, 1999).…”

Section: Introductionmentioning

confidence: 90%

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Behavioral heterogeneity in dynamic search situations: Theory and experimental evidence

Schunk

2009

Journal of Economic Dynamics and Control

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This paper presents models for search behavior and provides experimental evidence that behavioral heterogeneity in search is linked to heterogeneity in individual preferences. Observed search behavior is more consistent with a new model that assumes dynamic updating of utility reference points than with models that are based on expected-utility maximization. Specifically, reference point updating and loss aversion play a role for more than a third of the population. The findings are of practical relevance as well as of interest for researchers who incorporate behavioral heterogeneity into models of dynamic choice behavior in, for example, consumer economics, labor economics, finance, and decision theory. Behavioral Heterogeneity in Dynamic SearchSituations: Theory and Experimental Evidence Daniel Schunk * * Institute for Empirical Research in EconomicsUniversity of Zurich, SwitzerlandAbstract: This paper presents models for search behavior and provides experimental evidence that behavioral heterogeneity in search is linked to heterogeneity in individual preferences. Observed search behavior is more consistent with a new model that assumes dynamic updating of utility reference points than with models that are based on expectedutility maximization. Specifically, reference point updating and loss aversion play a role for more than a third of the population. The findings are of practical relevance as well as of interest for researchers who incorporate behavioral heterogeneity into models of dynamic choice behavior in, for example, consumer economics, labor economics, finance, and decision theory.

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Section: Discussionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 90%

Behavioral heterogeneity in dynamic search situations: Theory and experimental evidence

Schunk

2009

Journal of Economic Dynamics and Control

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“…The core idea of our theoretical framework is inspired by recent research suggesting that changes in expectations (or beliefs) about future outcomes are carriers of utility (Bowman, Minehart, and Rabin 1999;Rabin 2006, 2009). Consider the following illustration of this idea in the context of migration: in January, the employer informs an employee, who is a potential migrant with some basic intentions to migrate at some point in the future, that in July she/he will receive an unexpected wage increase because of improved future economic prospects for the company's business.…”

Section: Migration Prospects Based On Reference-dependent Expectationsmentioning

confidence: 99%

Migration and Economic Prospects

Czaika¹

2014

Journal of Ethnic and Migration Studies

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Uncertainty and risk perceptions are important elements in the decision-making process about migration. This study outlines a 'migration prospect theory', which aims to explain rather short-term fluctuations of migration flows as a consequence of expectation-based adjustment about future economic prospects. I argue that individuals with migration intentions continuously assess general economic prospects, including the labour market situation, at home and abroad in order to form reference points and updates for their migration-related expectations. Consequently, deviations from reference points generate expectation-based utility gains or losses for potential migrants, which affect the value of the migration option. This can lead to a cancellation or procrastination of the individual migration project. Based on an analysis of intraEuropean migration inflows to Germany between 2001 and 2010, supportive empirical evidence about some key implications of this migration prospect theory is found: first, migration flows respond more strongly to negative than to equal-sized positive economic prospects, indicating loss aversion of potential migrants; second, expectation-based prospects about the future economic situations in the home and potential destination country can both counterbalance or reinforce structural economic incentives based on real economic aggregates and third, migration flows show a diminishing sensitivity for larger fluctuations in expectation-based adjustments of economic prospects.

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“…Other research has examined prospect theory in relation to the wider economy, typically seeking to reveal loss averse preferences through consumption behavior in response to macroeconomic fluctuations (Bowman et al, 1999;Rosenblatt-Wisch, 2008;Foellmi et al, 2011). However, as Kahneman (1999, p. 19) observes, 'the extent to which loss aversion is also found in experience is not yet known'.…”

Section: Loss Aversionmentioning

confidence: 99%

Individual Experience of Positive and Negative Growth is Asymmetric: Global Evidence from Subjective Well-Being Data

et al. 2014

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Are individuals more sensitive to losses than gains in macroeconomic growth? Using subjective well-being measures across three large data sets, we observe an asymmetry in the way positive and negative economic growth are experienced, with losses having more than twice as much impact on individual happiness as compared to equivalent gains. We use Gallup World Poll data drawn from 151 countries, BRFSS data taken from a representative sample of 2.5 million US respondents, and Eurobarometer data that cover multiple business cycles over four decades. This research provides a new perspective on the welfare cost of business cycles with implications for growth policy and our understanding of the long-run relationship between GDP and subjective well-being. JEL Codes: D03, O11, D69, I39

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Loss aversion in a consumption–savings model

Cited by 307 publications

References 31 publications

Behavioral heterogeneity in dynamic search situations: Theory and experimental evidence

Behavioral heterogeneity in dynamic search situations: Theory and experimental evidence

Migration and Economic Prospects

Individual Experience of Positive and Negative Growth is Asymmetric: Global Evidence from Subjective Well-Being Data

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