The Effect of Wealth Shocks on Loss Aversion: Behavior and Neural Correlates

Abstract

Kahneman and Tversky (1979) first demonstrated that when individuals decide whether or not to accept a gamble, potential losses receive more weight than possible gains in the decision. This phenomenon is referred to as loss aversion. We investigated how loss aversion in risky financial decisions is influenced by sudden changes to wealth, employing both behavioral and neurobiological measures. We implemented an fMRI experimental paradigm, based on that employed by Tom et al. (2007). There are two treatments, called RANDOM and CONTINGENT. In RANDOM, the baseline setting, the changes to wealth, referred to as wealth shocks in economics, are independent of the actual choices participants make. Under CONTINGENT, we induce the belief that the changes in income are a consequence of subjects' own decisions. The magnitudes and sequence of the shocks to wealth are identical between the CONTINGENT and RANDOM treatments. We investigated whether more loss aversion existed in one treatment than another. The behavioral results showed significantly greater loss aversion in CONTINGENT compared to RANDOM after a negative wealth shock. No differences were observed in the response to positive shocks. The fMRI results revealed a neural loss aversion network, comprising the bilateral striatum, amygdala and dorsal anterior cingulate cortex that was common to the CONTINGENT and RANDOM tasks. However, the ventral prefrontal cortex, primary somatosensory cortex and superior occipital cortex, showed greater activation in response to a negative change in wealth due to individual's own decisions than when the change was exogenous. These results indicate that striatum activation correlates with loss aversion independently of the source of the shock, and that the ventral prefrontal cortex (vPFC) codes the experimental manipulation of agency in one's actions influencing loss aversion.

Fear-induced increases in loss aversion are linked to increased neural negative-value coding

“…Let us first consider how prospective gains and losses modulate brain activation. Consistent with previous research ( Tom et al., 2007 ; Canessa et al., 2013 ; Charpentier et al., 2016 ; Pammi et al., 2017 ), we observed partially overlapping sets of positive-value coding regions that showed activation that increases with the magnitude of prospective gains ( β gain, neutral > 0) or deactivations that become more negative with the magnitude of prospective losses ( β loss, neutral < 0) in the neutral-face condition. These regions include the bilateral striatum, ventral tegmental area, dorsal anterior cingulate cortex, anterior insula, paracingulate gyrus and rostral ACC/vmPFC, among others ( Figure 3A and Supplementary Table S1 for ROI-based and S2 for whole-brain results).…”

“…Notably, we also observed this effect in the amygdala. This is in contrast to the mixed results of some previous studies ( Tom et al., 2007 ; Canessa et al., 2013 ; Gelskov et al., 2015 ; Charpentier et al., 2016 ) but in line with a recent study that found ‘neural loss aversion’ in the amygdala, though it was unrelated to behavioral loss aversion in that study ( Pammi et al., 2017 ). We also found activations for prospective losses in the left amygdala and in the mOFC/vmPFC, consistent with previous observations ( Basten et al., 2010 ; Canessa et al., 2013 ; Sokol-Hessner et al., 2013 ; Häusler et al., 2016 ).…”

“…With the neutral-face condition, we replicated a previously observed feature termed ‘neural loss aversion,’ that is, greater deactivations for prospective losses relative to activations for prospective gains in a set of regions such as the striatum ( Tom et al., 2007 ; Canessa et al., 2013 ; Charpentier et al., 2016 ; Pammi et al., 2017 ). ‘Neural loss aversion,’ and loss-related deactivations in particular, also predicted behavioral loss aversion.…”

“…However, other studies observed stronger amygdala deactivations for prospective losses relative to gain-related activations (i.e. ‘neural loss aversion’; Pammi et al., 2017 )—implicating the amygdala’s involvement with the first system—or failed to find any loss-related amygdala activity ( Tom et al., 2007 ; Gelskov et al., 2015 ). Reconciling these seemingly contradictory findings with each other, electrophysiological and optogenetic studies (in rodents) have demonstrated both activation-based and deactivation-based loss signals in the amygdala ( Shabel and Janak, 2009 ; Beyeler et al., 2016 ).…”

Do negative economic shocks affect cognitive function, adherence to social norms and loss aversion?

“…By making a loss salient, NES may shift risk preferences in the loss domain. This is consistent with the results of Pammi et al (2017). Moreover, subjects facing losses in the lab are more likely to show present bias and hyperbolic discounting (Haushofer, Schunk, & Fehr, 2013), which is correlated with loss aversion (Dean & Ortoleva, 2019).…”