Loss aversion is not what we think it is
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Loss aversion is not what we think it is
1–10 of 27 posts
Re: Loss aversion is not what we think it is
#2Interesting. A way of testing the author's assertion would be to ask: who feels worse, a person who gains then loses $1000, or a person who loses then gains $1000?
If there is a difference, then the order of events has impact beyond the initial/end states.
Re: Loss aversion is not what we think it is
#3In summary, what is often described as "loss aversion" is actually just an expected property of diminishing marginal utility, and does not require a new term to explain it.
Loss aversion, instead, is state dependence that makes you feel worse about state X if you came from state X+1, and better about it if you came from state X-1 (assuming X is, say, wealth).
It seems to me that "loss aversion" might be reconstituted as "utility hysteresis" to avoid the ambiguity.
Re: Loss aversion is not what we think it is
#4I think the article is confusing. Loss aversion is a property of human decision making, while diminishing marginal utility is a property of some economic system.
The two may be the same, if you believe in (or talk about) subjective utility. But I think subjective utility is a terrible concept to begin with, so better not to go that route.
Re: Loss aversion is not what we think it is
#5Interesting. A way of testing the author's assertion would be to ask: who feels worse, a person who gains then loses $1000, or a person who loses then gains $1000? If there is a difference, then the order of events has impact beyond the initial/end states.
I gain interest in the first case :)
Re: Loss aversion is not what we think it is
#6Ugh. For a person with $1,000,000 in assets, the difference between +/- $100 in marginal utility is almost zero.
Yet all the psychological studies will show that said person HATES losing $100 much more than they like gaining $100. It's a major effect.
Heck, if you even give people the same amount of money but FRAME it as a loss versus a gain, people change their behavior. The marginal utility is identical!
Loss aversion is MUCH larger than any difference in marginal utility. It's a real thing, that has huge effects on our politics, our economics, our media and our entire lives.
TL;DR: Article writer has absolutely no idea what he is talking about.
Re: Loss aversion is not what we think it is
#7In summary, what is often described as "loss aversion" is actually just an expected property of diminishing marginal utility, and does not require a new term to explain it. Loss aversion, instead, is state dependence that makes you feel worse about state X if you came from state X+1, and better about it if you came from state X-1 (assuming X is, say, wealth). It seems to me that "loss aversion" might be reconstituted…
I like the phrase 'utility hysteresis'.
I would say that, at least academically, the difference between 'diminishing marginal utility' and 'loss aversion' is appreciated. To quote course material, 'When directly compared against each other, losses loom larger than gains'.
The difference in perception on the gain and loss side has been tested some, and the curve is supposed to look like this: https://goo.gl/PS8Z7c
Re: Loss aversion is not what we think it is
#8Interesting. A way of testing the author's assertion would be to ask: who feels worse, a person who gains then loses $1000, or a person who loses then gains $1000? If there is a difference, then the order of events has impact beyond the initial/end states.
I gain interest in the first case :)
Assuming no gravity, friction, or interest and your money is a perfect sphere ;)
Re: Loss aversion is not what we think it is
#9Bit of an overcomplicated proof that DMU implies that gains add less utility than an equivalent loss removes. A simpler proof goes as follows:
Let U be a concave utility function, and let 'w' and 'e' be some amount of 'wealth'. Concavity implies:
U(w+e)/2 + U(w-e)/2 hence
U(w+e) + U(w-e) rearranging the terms we find
(U(w+e) - U(w)) + (U(w-e) - U(w)) and therefore
U(w+e) - U(w) So gains add less utility than losses remove.
Re: Loss aversion is not what we think it is
#10In summary, what is often described as "loss aversion" is actually just an expected property of diminishing marginal utility, and does not require a new term to explain it. Loss aversion, instead, is state dependence that makes you feel worse about state X if you came from state X+1, and better about it if you came from state X-1 (assuming X is, say, wealth). It seems to me that "loss aversion" might be reconstituted…
"Loss aversion" should simply be seen as an observable behavior regardless of its cause. It makes no sense to say behavior stemming from diminishing marginal utility is not loss aversion if it leads to the same symptoms as "true" loss aversion.