Varieties of Loss Aversion
Lyle Brenner
University of Florida
Collaborators:
Baler Bilgin
Yuval Rottenstreich
Sanjay Sood
What is Loss Aversion?
 Initially, a component of the prospect theory
value function
10
8
6
4
v(X)
2
0
-15
-10
-5
-2 0
-4
-6
-8
-10
X
5
10
15
Loss Aversion in Risky Choice
 Loss aversion explains why the following gambles
are generally unattractive:
50% chance to win $X and 50% chance to lose $X
w(.5) v(+X) + w(.5) v(-X) < 0
or:
|v(-X)| > v(+X)
 Losing $X is more unpleasant that getting $X is
pleasant
 “Losses loom larger than gains”

Loss sensitivity rather than loss aversion?
Applications: (Myopic) Loss
Aversion
 Can explain excessively timid choices in
individual gambles, when a collection of
repeated gambles would seem attractive
(Kahneman & Lovallo, 1994)
 Can explain why stocks are historically
undervalued relative to bonds (Benartzi &
Thaler, 1995)
Loss Aversion in Riskless Choice:
Endowment Effect
 Loss aversion principle generalizes beyond realm of
gambles
Mug experiment (Kahneman, Knetsch & Thaler, 1992)
 Sellers: Mug worth $7.12 to those endowed with mug
 Buyers: Mug worth $2.87 to those not endowed with mug
 Choosers: indifferent between mug and $3.12
Conclusion: |v(lose mug)| > v(get mug)
Competing intuitions on staying vs.
switching
 Endowment effect (EE): tendency to stay
with what you’ve got; overly value your
possessions
 Grass is greener (GG): tendency to switch
to something else; overly value what you
don’t have
How to define losses and gains?
 How to interpret “Losses loom larger than
gains”?
 Ambiguity in definition of losses and gains
Defining loss and gain in terms of
valence
 Valence Loss: Something bad happens
 Valence Gain: Something good happens
Valence Loss Aversion (VLA):
 Valence losses loom larger than valence gains
 unpleasant changes are more extreme than
“equivalent” pleasant changes
Defining loss and gain in terms of
possession
 Possession Loss: Something leaves your
possession
 Possession Gain: Something comes into your
possession
Possession Loss Aversion (PLA):
 Possession losses loom larger than possession gains
Endowment Effect:
PLA, VLA, or both
Why is giving up a mug worse than getting a
mug is pleasurable?
 VLA: giving up mug is a big deal because
it’s negative (rather than positive)
 PLA: giving up mug is a big deal because it
involves giving up (rather than receiving)
Relationship between Valence and
Possession Changes
Possession Change
Possession Gain Possession Loss
Valence
Gain
Valence
Change
Valence
Loss
Relationship between Valence and
Possession Changes: Goods
Possession Change
Possession Gain Possession Loss
Valence
Gain
Valence
Change
Valence
Loss
Receive Mug
Give up Mug
With “Goods”, possession gain/loss and valence
gain/loss are confounded (positively)
Relationship between Valence and
Possession Changes: Bads
Possession Change
Possession Gain Possession Loss
Valence
Gain
Valence
Change
Valence
Loss
“Give up”
nausea
“Receive”
nausea
With “Bads”, possession gain/loss and valence
gain/loss are confounded (negatively)
Stay or Switch Predictions: Goods
Goods: Have +X, can switch to +Y
 VLA  stay with +X
– (because negatives of giving up +X loom larger than
positives of getting +Y)
 PLA  stay with +X
– (because giving up +X looms larger than getting +Y)
 Both VLA and PLA predict a tendency to stay 
endowment effect
Stay or Switch Predictions: Bads
Bads: Have -X, can switch to -Y
 VLA  stay with -X
– (because negatives of getting -Y loom larger than
positives of giving up -X)
 PLA  switch to -Y
– (because giving up -X looms larger than getting -Y)
 VLA predicts staying  endowment effect;
 PLA predicts switching  grass is greener effect
 Or if both VLA and PLA occur, then they push in
opposite directions
Problem 1B
Imagine that while driving to school one day, you’re
caught going 45 mph in a 30 mph zone and given a
speeding ticket. The penalty for the ticket is a fine of
$100.
A few days later, you receive a letter offering you the
option of switching penalties. In particular, you may
attend 3 three-hour sessions of traffic school instead
of paying the fine of $100.
Choice: Stay with fine, or switch to traffic school?
Problems 1G and 1B: Results
Goods, Radio station call-in prize: $100, or free Jetski rental
 Cash default: 83% stay
 Jetski default: 30% stay
 STAYSUM = 113% > 100% (endowment effect)
Bads, Speeding penalties: $100 fine, or traffic school
 Fine default: 12% stay
 Traffic school default: 70% stay
 STAYSUM = 82% < 100% (grass is greener effect)
Problems 2G and 2B: Results
Goods, Jobs: More money, or more vacation days
 $$ default: 59% stay
 Vacation Days default: 65% stay
 STAYSUM = 124% > 100% (endowment effect)
Bads, Jobs: Long commute, or work weekends
 Commute default: 52% stay
 Work weekends default: 24% stay
 STAYSUM = 76% < 100% (grass is greener effect)
Problems 3G and 3B: Results
Goods, Apartments: Spacious, or great location
 Spacious default: 71% stay
 Location default: 44% stay
 STAYSUM = 115% > 100% (endowment effect)
Bads, Apartments: Noisy, or cramped
 Noisy default: 66% stay
 Cramped default: 39% stay
 STAYSUM = 105% ~= 100% (no effect)
PL>PG
EE+, GG-,
GG- > EE+
EE+, GG-,
EE+ > GG-
GGEE-
2
1
3
GG+, GG-,
GG- > GG+
EE+, EE-,
EE+ > EE-
|VL|<VG
|VL|>VG
EE+, EE-,
EE- > EE+
GG+, GG-,
GG+ > GG-
GG+, EE-,
GG+ > EE-
GG+, EE-,
EE+ > EE-
EE+
GG+
PL<PG
Ratings: Getting and giving up bads
Valence Loss & Possession Gain:
 Imagine that you wake up one day with a really
bad zit right on the tip of your nose. How
unhappy would you feel about getting the zit?
Valence Gain & Possession Loss:
 Imagine that you wake up one day, and a really
bad zit that used to be on the tip of your nose
has disappeared! How happy would you feel
about the zit going away?
Ratings: Getting and giving up bads
 Get zit: unhappy rating 6.0 (on 1-9 scale)
 Lose zit: happy rating: 6.5
 Get side effects: unhappy rating 6.1
 Lose side effects: happy rating: 6.9
Still more flavors of loss aversion
Defining “loom larger”:
 Looming as valuation (intensity of feeling):
– Losses feel worse than gains feel good
 Looming as attention/salience:
– Losses dominate attention more than gains
Hotel Choice
Golden Palms: Better condition, worse location
Ocean View: Better location, worse condition
Hotel Choice
Golden Palms: Better condition, worse location
Ocean View: Better location, worse condition
70%
60%
GP default
OV default
50%
40%
30%
Choice (GP>OV)
Salience
(Condition >
Location)
Valuation
(Condition >
Location)
Hotel Choice: Mediation/decomposition
of endowment effect
15%
10%
5%
0%
Overall
endowment
effect
Controlling for Controlling for Controlling for
Valuation
Salience
Valuation and
Salience
Summary
 Different definitions of losses & gains 
different flavors of loss aversion (PLA & VLA)
– Patterns of EE and GG effects: Evidence for PLA in
addition to (or in place of) VLA
 Different definitions of “loom larger” 
different flavors of loss aversion
– Evidence for both attentional and valuation components