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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)

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Presentation on theme: "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)"— Presentation transcript:

1 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)

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

3 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

4 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

5 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 20155 Tested on over 6,600 respondents across six studies

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

7 Development of the Loss Aversion Measure Existing Approaches Assume an underlying model of decisions over risk 3 Oct 2015ACR Conference 20157 Kahneman & Tversky, 1979; Tversky & Kahneman, 1992; Toubia et al., 2013

8 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 20158 Kahneman & Tversky, 1979; Tversky & Kahneman, 1992; Toubia et al., 2013

9 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 20159 Kahneman & Tversky, 1979; Tversky & Kahneman, 1992; Toubia et al., 2013

10 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 201510 Kahneman & Tversky, 1979; Tversky & Kahneman, 1992; Toubia et al., 2013

11 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 201511 Kahneman & Tversky, 1979; Tversky & Kahneman, 1992; Toubia et al., 2013 Brooks & Zank, 2005

12 Development of the Loss Aversion Measure 3 Oct 2015ACR Conference 201512 1 2 3

13 Development of the Loss Aversion Measure 3 Oct 2015ACR Conference 201513 Participants are asked to choose between two gambles in each step 1 2 3

14 Development of the Loss Aversion Measure 3 Oct 2015ACR Conference 201514 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

15 Development of the Loss Aversion Measure 3 Oct 2015ACR Conference 201515 1 2 3 69% 58% 44% Most respondents express some degree of loss aversion by preferring a loss-averse gamble to a matched gain- seeking gamble

16 Development of the Loss Aversion Measure 3 Oct 2015ACR Conference 201516 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

17 The Studies 3 Oct 2015ACR Conference 201517 Study 1 N = 832 48.7% female, M age = 50.5 Study 2 N = 1,432 49.8% female, M age = 44.3 Study 3 N = 1,113 49.7% female, M age = 53.1 Study 4 N = 1,452 69.7% female, M age = 53.3 Study 5 N = 1,010 71.2% female, M age = 57.4 Study 6 N = 831 49.1% female, M age = 35.1

18 The Studies 3 Oct 2015ACR Conference 201518 Study 1 N = 832 48.7% female, M age = 50.5 Study 2 N = 1,432 49.8% female, M age = 44.3 Study 3 N = 1,113 49.7% female, M age = 53.1 Study 4 N = 1,452 69.7% female, M age = 53.3 Study 5 N = 1,010 71.2% female, M age = 57.4 Study 6 N = 831 49.1% female, M age = 35.1 Across Studies N = 6,670

19 The Studies 3 Oct 2015ACR Conference 201519 Study 1 N = 832 48.7% female, M age = 50.5 Study 2 N = 1,432 49.8% female, M age = 44.3 Study 3 N = 1,113 49.7% female, M age = 53.1 Study 4 N = 1,452 69.7% female, M age = 53.3 Study 5 N = 1,010 71.2% female, M age = 57.4 Study 6 N = 831 49.1% female, M age = 35.1 Across Studies N = 6,670 Demographic Variables -Age -Expected Age (Life Expectancy) -Gender -Subjective Health

20 The Studies 3 Oct 2015ACR Conference 201520 Study 1 N = 832 48.7% female, M age = 50.5 Study 2 N = 1,432 49.8% female, M age = 44.3 Study 3 N = 1,113 49.7% female, M age = 53.1 Study 4 N = 1,452 69.7% female, M age = 53.3 Study 5 N = 1,010 71.2% female, M age = 57.4 Study 6 N = 831 49.1% 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)

21 Results: Loss Aversion Measure, By Study (Raw Score) 3 Oct 2015ACR Conference 201521

22 Results: Loss Aversion Measure, By Study (Raw Score) 3 Oct 2015ACR Conference 201522

23 Results: Loss Aversion Measure, Across Studies 2 – 6 3 Oct 2015ACR Conference 201523

24 Results: Loss Aversion Measure, Across Studies 2 – 6 3 Oct 2015ACR Conference 201524 Loss aversion measure is relatively normally distributed – no clustering at either end of the scale

25 Results: Lambda Across Studies 2 - 6 3 Oct 2015ACR Conference 201525

26 Results: Lambda Across Studies 2 - 6 3 Oct 2015ACR Conference 201526 Average lambda across studies is 2.16

27 Results: Lambda Across Studies 2 - 6 3 Oct 2015ACR Conference 201527 The lambda coefficient shows a jump from lambdas below one (loss-seeking) to lambdas above one (loss aversion)

28 Correlates of Loss Aversion Loss Aversion (1)(2)(3) Std Age 0.040.003-0.05 (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 (0.01) SSA Exist -0.0004-0.001 (0.001) (0.003) Intertemporal Choice -0.11***-0.08 (0.03)(0.07) Health -0.04 (0.05) N 5,8634,3051,016 3 Oct 2015ACR Conference 201528 * p < 0.05, ** p < 0.01, *** p < 0.001

29 Correlates of Loss Aversion Loss Aversion (1)(2)(3) Std Age 0.040.003-0.05 (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 (0.01) SSA Exist -0.0004-0.001 (0.001) (0.003) Intertemporal Choice -0.11***-0.08 (0.03)(0.07) Health -0.04 (0.05) N 5,8634,3051,016 3 Oct 2015ACR Conference 201529 * p < 0.05, ** p < 0.01, *** p < 0.001

30 Loss Aversion Measure, by Gender 3 Oct 2015ACR Conference 201530 Males are less loss averse than females (p <.001)

31 Correlates of Loss Aversion Loss Aversion (1)(2)(3) Std Age 0.040.003-0.05 (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 (0.01) SSA Exist -0.0004-0.001 (0.001) (0.003) Intertemporal Choice -0.11***-0.08 (0.03)(0.07) Health -0.04 (0.05) N 5,8634,3051,016 3 Oct 2015ACR Conference 201531 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

32 Correlates of Loss Aversion Loss Aversion (1)(2)(3) Std Age 0.040.003-0.05 (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 (0.01) SSA Exist -0.0004-0.001 (0.001) (0.003) Intertemporal Choice -0.11***-0.08 (0.03)(0.07) Health -0.04 (0.05) N 5,8634,3051,016 3 Oct 2015ACR Conference 201532 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

33 Correlates of Loss Aversion Loss Aversion (1)(2)(3) Std Age 0.040.003-0.05 (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 (0.01) SSA Exist -0.0004-0.001 (0.001) (0.003) Intertemporal Choice -0.11***-0.08 (0.03)(0.07) Health -0.04 (0.05) N 5,8634,3051,016 3 Oct 2015ACR Conference 201533 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

34 Implications: Retirement Behaviors 3 Oct 2015ACR Conference 201534 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 -0.06-0.680.85**-0.19**-0.03*** (0.04)(0.46)(0.39)(0.08)(0.01) Manipulation Controls Yes ** p < 0.05, *** p < 0.01

35 Implications: Retirement Behaviors 3 Oct 2015ACR Conference 201535 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 -0.06-0.680.85**-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

36 Implications: Retirement Behaviors 3 Oct 2015ACR Conference 201536 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 -0.06-0.680.85**-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

37 Implications: Retirement Behaviors 3 Oct 2015ACR Conference 201537 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 -0.06-0.680.85**-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

38 Implications: Retirement Behaviors 3 Oct 2015ACR Conference 201538 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 -0.06-0.680.85**-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

39 Takeaways 3 Oct 2015ACR Conference 201539 Formulated an easy-to-implement, model-free loss aversion measure

40 Takeaways 3 Oct 2015ACR Conference 201540 Formulated an easy-to-implement, model-free loss aversion measure Demonstrated the relationship between demographic/psychographic variables and our loss aversion measure

41 Takeaways 3 Oct 2015ACR Conference 201541 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

42 THANK YOU!! Elizabeth C. Webb ecw2144@gsb.columbia.edu

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