Search results for "Loss aversion"
showing 10 items of 14 documents
Portfolio performance evaluation with loss aversion
2011
In this paper we consider a loss-averse investor equipped with a specific, but still quite general, utility function motivated by behavioral finance. We show that, under certain concrete assumptions concerning the form of this utility, one can derive closed-form solutions for the investor's portfolio performance measure. We investigate the effects of loss aversion and demonstrate its important role in performance measurement. The framework presented in this paper also provides a sound theoretical foundation for all known performance measures based on partial moments of the distribution.
Heart rate variability after vigorous physical exercise is positively related to loss aversion
2020
Loss aversion bias, whereby losses loom larger than gains, can be reduced by stress. At the same time, vigorous physical exercise is a powerful neuroendocrine stressor and heart rate variability (HRV) provides an objective measure of the actual exercise impact, relative to each individual physical condition. Our aim was to study whether vigorous exercise can influence loss aversion, considering HRV in this relation. We hypothesized that the lower HRV derived from vigorous exercise (i.e., when stressor produced the most impact) would predict a lower loss aversion.Two groups (Experimental,Results revealed a significant group x HRV interaction. In the control group, HRV was not associated with…
The effects of personality, risk and other-regarding attitudes on trust and reciprocity
2022
Abstract This paper reports experimental results on the determinants of trust and reciprocity in the context of a genuinely sequential, binary Trust Game. Apart from behavior in the main experiment, subjects’ risk attitudes and inequality aversion are elicited, as well as the traits of neuroticism and agreeableness, captured through the five-factor model. The findings suggest that trustors’ (first movers) behavior is affected by their loss aversion, while trustees’ (second movers) reciprocal behavior is not explained by any of their other-regarding attitudes, but, rather, by their agreeableness.
Early stages of the acute physical stress response increase loss aversion and learning on decision making: A Bayesian approach
2021
Abstract When the cortisol peak is reached after a stressor people learn slower and make worse decisions in the Iowa Gambling Task (IGT). However, the effects of the early stress response have not received as much attention. Since physical exercise is an important neuroendocrine stressor, this study aimed to fill this gap using an acute physical stressor. We hypothesized that this stress stage would promote an alertness that may increase feedback-sensitivity and, therefore, reward-learning during IGT, leading to a greater overall decision-making. 90 participants were divided into two groups: 47 were exposed to an acute intense physical stressor (cycloergometer) and 43 to a distractor 5 min …
The role of «perceived loss» aversion on credit screening: an experiment
2013
A major characteristic of credit markets is information asymmetry.To combat its problems, as credit rationing, principals can use a menu of contracts to screen clients with different risk level. We conduct a laboratory experiment to address an important question for such settings —does the framing of the offered menu of contracts interfere with the self-selection mechanism? The answer is yes. We find subjects' choices shift when the same (positive) outcomes of the same menu of contracts are presented in two different frames. Subjects exhibit loss aversion in their perception of the positive outcomes below the reference point, and self-selection fails to occur. Uno de los mayores problemas a…
How Long-Term Contracts can Mitigate Inefficient Renegotiation Arising Due to Loss Aversion
2021
A loss-averse buyer and seller face an uncertain environment. Should they write a long-term contract or wait until the state of the world is realized? I show that simple long-term contracts perform better than insinuated in Herweg and Schmidt (2015), even though loss aversion makes renegotiation sometimes inefficient. During renegotiation, the outcome induced by the long-term contract constitutes the reference point to which the parties compare gains and losses induced by the renegotiated transaction. Whereas Herweg and Schmidt consider that the long-term contract is always performed, it should not in "bad" states. This alters the threat point in renegotiation, making it easier to renegotia…
Why retail investors traded equity during the pandemic? An application of artificial neural networks to examine behavioral biases
2021
Behavioral biases are known to influence the investment decisions of retail investors. Indeed, extant research has revealed interesting findings in this regard. However, the literature on the impact of these biases on millennials' trading activity, particularly during a health crisis like the COVID-19 pandemic, as well as the equity recommendation intentions of such investors, is limited. The present study addressed these gaps by investigating the influence of eight behavioral biases: overconfidence and self-attribution, over-optimism, hindsight, representativeness, anchoring, loss aversion, mental accounting, and herding on the trading activity and recommendation intentions of millennials …
Prospect theory and stochastic multicriteria acceptability analysis (SMAA)
2009
Abstract We consider problems where multiple decision makers (DMs) want to choose their most preferred alternative from a finite set based on multiple criteria. Several approaches to support DMs in such problems have been suggested. Prospect theory has appealed to researchers through its descriptive power, but rare attempts have been made to apply it to support multicriteria decision making. The basic idea of prospect theory is that alternatives are evaluated by a difference function in terms of gains and losses with respect to a reference point. The function is suggested to be concave for gains and convex for losses and steeper for losses than for gains. Stochastic multicriteria acceptabil…
Emotional stress & decision-making: an emotional stressor significantly reduces loss aversion
2021
Stress influences loss aversion, the principle that losses loom larger than gains, although the nature of this relationship is unclear. Studies show that stress reduces loss aversion; however, stress response has been only studied by means of physiological measures, but the stressor emotional impact remained unclear. Since emotions can modify stress response and increase the activity of the loss aversion neural substrates, it could be expected that an emotional stressor may produce the opposite effect, i.e. loss aversion increase. 69 participants were divided into experimental and control group. The first one was exposed to emotional stress through a 5-minutes video, and control group viewe…
A Generalization of the Mean-Variance Analysis
2008
In this paper we consider a decision maker whose utility function has a kink at the reference point with different functions below and above this reference point. We also suppose that the decision maker generally distorts the objective probabilities. First we show that the expected utility function of this decision maker can be approximated by a function of mean and partial moments of distribution. This "mean-partial moments" utility generalizes not only the mean-variance utility of Tobin and Markowitz, but also the mean-semivariance utility of Markowitz. Then, in the spirit of Arrow and Pratt, we derive an expression for a risk premium when risk is small. Our analysis shows that a decision…