Development of an Individual Measure of Loss Aversion John W. Payne (Duke) Suzanne B. Shu (UCLA and NBER) Elizabeth C. Webb (Columbia)* Namika Sagara (Duke)

Overview Development of a model-free individual-level measure of loss aversion 3 Oct 2015ACR Conference 20152

Overview Development of a model-free individual-level measure of loss aversion How loss aversion measure correlates with other individual- level measures 3 Oct 2015ACR Conference 20153

Overview Development of a model-free individual-level measure of loss aversion How loss aversion measure correlates with other individual- level measures Whether loss aversion measure is predictive of consumer behavior 3 Oct 2015ACR Conference 20154

Overview Development of a model-free individual-level measure of loss aversion How loss aversion measure correlates with other individual- level measures Whether loss aversion measure is predictive of consumer behavior 3 Oct 2015ACR Conference Tested on over 6,600 respondents across six studies

Development of the Loss Aversion Measure Existing Approaches 3 Oct 2015ACR Conference 20156

Development of the Loss Aversion Measure Existing Approaches Assume an underlying model of decisions over risk 3 Oct 2015ACR Conference Kahneman & Tversky, 1979; Tversky & Kahneman, 1992; Toubia et al., 2013

Development of the Loss Aversion Measure Existing Approaches Assume an underlying model of decisions over risk Use 50:50 two-outcome gambles 3 Oct 2015ACR Conference Kahneman & Tversky, 1979; Tversky & Kahneman, 1992; Toubia et al., 2013

Development of the Loss Aversion Measure Existing Approaches Assume an underlying model of decisions over risk Use 50:50 two-outcome gambles Our Approach 3 Oct 2015ACR Conference Kahneman & Tversky, 1979; Tversky & Kahneman, 1992; Toubia et al., 2013

Development of the Loss Aversion Measure Existing Approaches Assume an underlying model of decisions over risk Use 50:50 two-outcome gambles Our Approach Model-free 3 Oct 2015ACR Conference Kahneman & Tversky, 1979; Tversky & Kahneman, 1992; Toubia et al., 2013

Development of the Loss Aversion Measure Existing Approaches Assume an underlying model of decisions over risk Use 50:50 two-outcome gambles Our Approach Model-free Slightly more complex, mixed three-outcome gambles 3 Oct 2015ACR Conference Kahneman & Tversky, 1979; Tversky & Kahneman, 1992; Toubia et al., 2013 Brooks & Zank, 2005

Development of the Loss Aversion Measure 3 Oct 2015ACR Conference

Development of the Loss Aversion Measure 3 Oct 2015ACR Conference Participants are asked to choose between two gambles in each step 1 2 3

Development of the Loss Aversion Measure 3 Oct 2015ACR Conference Participants are asked to choose between two gambles in each step One gamble in the pair is always the more loss averse choice 1 2 3

Development of the Loss Aversion Measure 3 Oct 2015ACR Conference % 58% 44% Most respondents express some degree of loss aversion by preferring a loss-averse gamble to a matched gain- seeking gamble

Development of the Loss Aversion Measure 3 Oct 2015ACR Conference Participants are asked to choose between two gambles in each step One gamble in the pair is always the more loss averse choice Yields an overall measure of loss aversion per participant 1 2 3

The Studies 3 Oct 2015ACR Conference Study 1 N = % female, M age = 50.5 Study 2 N = 1, % female, M age = 44.3 Study 3 N = 1, % female, M age = 53.1 Study 4 N = 1, % female, M age = 53.3 Study 5 N = 1, % female, M age = 57.4 Study 6 N = % female, M age = 35.1

The Studies 3 Oct 2015ACR Conference Study 1 N = % female, M age = 50.5 Study 2 N = 1, % female, M age = 44.3 Study 3 N = 1, % female, M age = 53.1 Study 4 N = 1, % female, M age = 53.3 Study 5 N = 1, % female, M age = 57.4 Study 6 N = % female, M age = 35.1 Across Studies N = 6,670

The Studies 3 Oct 2015ACR Conference Study 1 N = % female, M age = 50.5 Study 2 N = 1, % female, M age = 44.3 Study 3 N = 1, % female, M age = 53.1 Study 4 N = 1, % female, M age = 53.3 Study 5 N = 1, % female, M age = 57.4 Study 6 N = % female, M age = 35.1 Across Studies N = 6,670 Demographic Variables -Age -Expected Age (Life Expectancy) -Gender -Subjective Health

The Studies 3 Oct 2015ACR Conference Study 1 N = % female, M age = 50.5 Study 2 N = 1, % female, M age = 44.3 Study 3 N = 1, % female, M age = 53.1 Study 4 N = 1, % female, M age = 53.3 Study 5 N = 1, % female, M age = 57.4 Study 6 N = % female, M age = 35.1 Across Studies N = 6,670 Demographic Variables -Age -Expected Age (Life Expectancy) -Gender -Subjective Health Other Variables -Social Security Solvency -Intertemporal Patience -Retirement Savings (Behaviors)

Results: Loss Aversion Measure, By Study (Raw Score) 3 Oct 2015ACR Conference

Results: Loss Aversion Measure, By Study (Raw Score) 3 Oct 2015ACR Conference

Results: Loss Aversion Measure, Across Studies 2 – 6 3 Oct 2015ACR Conference

Results: Loss Aversion Measure, Across Studies 2 – 6 3 Oct 2015ACR Conference Loss aversion measure is relatively normally distributed – no clustering at either end of the scale

Results: Lambda Across Studies Oct 2015ACR Conference

Results: Lambda Across Studies Oct 2015ACR Conference Average lambda across studies is 2.16

Results: Lambda Across Studies Oct 2015ACR Conference The lambda coefficient shows a jump from lambdas below one (loss-seeking) to lambdas above one (loss aversion)

Correlates of Loss Aversion Loss Aversion (1)(2)(3) Std Age (0.02)(0.03)(0.10) Std Expected Age -0.14***-0.10***-0.21** (0.02)(0.03)(0.07) Gender -0.43***-0.38***-0.53*** (0 = Female, 1 = Male) (0.05)(0.06)(0.11) Savings (0.01) SSA Exist (0.001) (0.003) Intertemporal Choice -0.11***-0.08 (0.03)(0.07) Health (0.05) N 5,8634,3051,016 3 Oct 2015ACR Conference * p < 0.05, ** p < 0.01, *** p < 0.001

Correlates of Loss Aversion Loss Aversion (1)(2)(3) Std Age (0.02)(0.03)(0.10) Std Expected Age -0.14***-0.10***-0.21** (0.02)(0.03)(0.07) Gender -0.43***-0.38***-0.53*** (0 = Female, 1 = Male) (0.05)(0.06)(0.11) Savings (0.01) SSA Exist (0.001) (0.003) Intertemporal Choice -0.11***-0.08 (0.03)(0.07) Health (0.05) N 5,8634,3051,016 3 Oct 2015ACR Conference * p < 0.05, ** p < 0.01, *** p < 0.001

Loss Aversion Measure, by Gender 3 Oct 2015ACR Conference Males are less loss averse than females (p <.001)

Correlates of Loss Aversion Loss Aversion (1)(2)(3) Std Age (0.02)(0.03)(0.10) Std Expected Age -0.14***-0.10***-0.21** (0.02)(0.03)(0.07) Gender -0.43***-0.38***-0.53*** (0 = Female, 1 = Male) (0.05)(0.06)(0.11) Savings (0.01) SSA Exist (0.001) (0.003) Intertemporal Choice -0.11***-0.08 (0.03)(0.07) Health (0.05) N 5,8634,3051,016 3 Oct 2015ACR Conference Average life expectancy is significantly correlated with the loss aversion measure – individuals who expect to live longer have lower loss aversion measures on average * p < 0.05, ** p < 0.01, *** p < 0.001

Correlates of Loss Aversion Loss Aversion (1)(2)(3) Std Age (0.02)(0.03)(0.10) Std Expected Age -0.14***-0.10***-0.21** (0.02)(0.03)(0.07) Gender -0.43***-0.38***-0.53*** (0 = Female, 1 = Male) (0.05)(0.06)(0.11) Savings (0.01) SSA Exist (0.001) (0.003) Intertemporal Choice -0.11***-0.08 (0.03)(0.07) Health (0.05) N 5,8634,3051,016 3 Oct 2015ACR Conference Intertemporal patience is significantly correlated with the loss aversion measure – participants who are more patient are also less loss averse on average * p < 0.05, ** p < 0.01, *** p < 0.001

Correlates of Loss Aversion Loss Aversion (1)(2)(3) Std Age (0.02)(0.03)(0.10) Std Expected Age -0.14***-0.10***-0.21** (0.02)(0.03)(0.07) Gender -0.43***-0.38***-0.53*** (0 = Female, 1 = Male) (0.05)(0.06)(0.11) Savings (0.01) SSA Exist (0.001) (0.003) Intertemporal Choice -0.11***-0.08 (0.03)(0.07) Health (0.05) N 5,8634,3051,016 3 Oct 2015ACR Conference Self-reported level of savings and health, as well as subjective beliefs about Social Security solvency are not significantly correlated with the loss aversion measure * p < 0.05, ** p < 0.01, *** p < 0.001

Implications: Retirement Behaviors 3 Oct 2015ACR Conference ClaimingAnnuitiesBondsSavingsCombined Constant 64.19***30.55***41.64***6.45***-0.52*** (1.0)(10.5)(9.0)(1.9)(0.2) DemographicsYes Loss aversion **-0.19**-0.03*** (0.04)(0.46)(0.39)(0.08)(0.01) Manipulation Controls Yes ** p < 0.05, *** p < 0.01

Implications: Retirement Behaviors 3 Oct 2015ACR Conference ClaimingAnnuitiesBondsSavingsCombined Constant 64.19***30.55***41.64***6.45***-0.52*** (1.0)(10.5)(9.0)(1.9)(0.2) DemographicsYes Loss aversion **-0.19**-0.03*** (0.04)(0.46)(0.39)(0.08)(0.01) Manipulation Controls Yes The loss aversion measure is a significant predictor of several consumer financial decision-making behaviors ** p < 0.05, *** p < 0.01

Implications: Retirement Behaviors 3 Oct 2015ACR Conference ClaimingAnnuitiesBondsSavingsCombined Constant 64.19***30.55***41.64***6.45***-0.52*** (1.0)(10.5)(9.0)(1.9)(0.2) DemographicsYes Loss aversion **-0.19**-0.03*** (0.04)(0.46)(0.39)(0.08)(0.01) Manipulation Controls Yes The loss aversion measure is a significant predictor of several consumer financial decision-making behaviors More loss averse individuals prefer bonds (over equities), save less, and show overall myopia in retirement- related decisions ** p < 0.05, *** p < 0.01

Implications: Retirement Behaviors 3 Oct 2015ACR Conference ClaimingAnnuitiesBondsSavingsCombined Constant 64.19***30.55***41.64***6.45***-0.52*** (1.0)(10.5)(9.0)(1.9)(0.2) DemographicsYes Loss aversion **-0.19**-0.03*** (0.04)(0.46)(0.39)(0.08)(0.01) Manipulation Controls Yes The loss aversion measure is a significant predictor of several consumer financial decision-making behaviors More loss averse individuals prefer bonds (over equities), save less, and show overall myopia in retirement- related decisions ** p < 0.05, *** p < 0.01

Implications: Retirement Behaviors 3 Oct 2015ACR Conference ClaimingAnnuitiesBondsSavingsCombined Constant 64.19***30.55***41.64***6.45***-0.52*** (1.0)(10.5)(9.0)(1.9)(0.2) DemographicsYes Loss aversion **-0.19**-0.03*** (0.04)(0.46)(0.39)(0.08)(0.01) Manipulation Controls Yes The loss aversion measure is a significant predictor of several consumer financial decision-making behaviors More loss averse individuals prefer bonds (over equities), save less, and show overall myopia in retirement- related decisions ** p < 0.05, *** p < 0.01

Takeaways 3 Oct 2015ACR Conference Formulated an easy-to-implement, model-free loss aversion measure

Takeaways 3 Oct 2015ACR Conference Formulated an easy-to-implement, model-free loss aversion measure Demonstrated the relationship between demographic/psychographic variables and our loss aversion measure

Takeaways 3 Oct 2015ACR Conference Formulated an easy-to-implement, model-free loss aversion measure Demonstrated the relationship between demographic/psychographic variables and our loss aversion measure Our loss aversion measure is a significant predictor of important financial decision-making behaviors

THANK YOU!! Elizabeth C. Webb