why you can t find a taxi in the rain and other labor supply lessons from cab drivers i replicate and extend the seminal work of camerer et al labor supply of new york city cabdrivers one day at a time quarterly journal of economics 112 1997 407 441 who find that the wage elasticity of daily hours of work for new york city taxi drivers is negative and conclude that their labor supply behavior is consistent with reference dependence in contrast my analysis of the complete record of all trips taken in nyc taxi cabs from 2009 to 2013 shows that drivers tend to respond positively to unanticipated as well as anticipated increases in earnings opportunities additionally using a discrete choice stopping model the probability of a shift ending is strongly positively related to hours worked but at best weakly related to income earned i find substantial heterogeneity across drivers in their elasticities but the estimated elasticities are generally positive and rarely substantially negative i find that new drivers with smaller elasticities are more likely to exit the industry whereas drivers who remain quickly learn to be better optimizers have positive labor supply elasticities that grow with experience these results are consistent with the neoclassical optimizing model of labor supply and suggest that consideration of gain loss utility and income reference dependence is not an important factor in the daily labor supply decisions of taxi drivers jel codes d01 d03 j22

risk preferences around the world we present results from a large scale international survey on risk preferences conducted in 53 countries in all countries we find on average an attitude of risk aversion in gains and of risk seeking in losses the degree of risk aversion shows significant cross country differences moreover risk attitudes in our sample depend not only on economic conditions but also on cultural factors as measured by the hofstede dimensions individualism and uncertainty avoidance the data may also serve as an interesting starting point for further research on cultural differences in behavioral economics data as supplemental material are available at http dx doi org 10 1287 mnsc 2013 1869 this paper was accepted by peter wakker decision analysis

assessing the rebound effect using a natural experiment setting evidence from the private transportation sector in israel subsidizing energy efficient technologies is considered by energy and environmental organizations to be one of the most effective policies for decreasing energy consumption in the transportation sector such policies are becoming ever more popular and have been implemented in a considerable number of countries in recent years because these policies promote energy efficient cars with lower usage costs they may rebound and increase the distances traveled by households that have switched to energy efficient cars from an econometric perspective a subsidization policy can be used as a valid instrument to identify the households choice of energy efficiency levels of the cars they own this identification in turn can be utilized to account for endogeneity in the estimation of a rebound effect the present study uses a natural experiment setting of such a policy implemented in israel in 2009 the empirical results indicate a fairly large average rebound effect of 40 the results also indicate that while the policy indeed encouraged the purchase of energy efficient cars households that bought a new or used car during the surveyed period did not generate a rebound effect of a different magnitude compared with other households that did not we discuss the implications of our findings

the boundaries of loss aversion abstract in this article the authors propose some psychological principles to describe the boundaries of loss aversion a key idea is that exchange goods that are given up as intended do not exhibit loss aversion for example the authors propose that money given up in purchases is not generally subject to loss aversion the results of several experiments provide preliminary support for the hypotheses the authors find that consistent with prospect theory loss aversion provides a complete account of risk aversion for risks with equal probability to win or lose the authors propose boundaries for this result and suggest further tests of the model

psychological factors and stock option exercise we investigate stock option exercise decisions by over 50 000 employees at seven corporations controlling for economic factors psychological factors influence exercise consistent with psychological models of beliefs employees exercise in response to stock price trends exercise is positively related to stock returns during the preceding month and negatively related to returns over longer horizons consistent with psychological models of values that include reference points employee exercise activity roughly doubles when the stock price exceeds the maximum price attained during the previous year

risk attitudes to low probability climate change risks wtp for flood insurance abstract natural disasters may increase in frequency and severity in the future as a result of climate change which is likely to have an impact on the demand for natural disaster insurance insights about individual risk beliefs and behavioural responses to changing risks are relevant for insurers as it allows them for example to estimate the demand for new insurance products that cover weather related damage this study elicits individual risk beliefs and the demand for low probability high impact flood insurance using the contingent valuation survey method among approximately 1000 homeowners in the dutch river delta this study is of practical relevance since currently flood insurance is not available in the netherlands while insurers have been considering to provide such insurance individuals generally do not behave in accordance with the expected utility model since a significant proportion of homeowners neglect the low probability flood risk the willingness to pay wtp of those individuals who demand flood insurance is on average considerably higher than the expected value of the flood risk they face moreover the wtp for flood insurance is less than proportionally related to increased flood probabilities that were presented to respondents in the questionnaire individuals follow a process of bayesian updating of flood probabilities since perceptions of flood risk are an important determinant of the wtp while objective risks derived from geographical characteristics influence the wtp to a lesser extent communication of baseline probabilities and changes in flood probabilities using risk ladders facilitate the comprehension of risk by respondents and has a considerable effect on the level of the wtp and its sensitivity to probability changes the results indicate that the current ex post public compensation scheme of flood damage lowers demand for private insurance

impulse balance in the newsvendor game abstract one striking behavioral phenomenon is the pull to center bias in the newsvendor game facing stochastic demand subjects tend to order quantities between the expected profit maximizing quantity and mean demand we show that the impulse balance equilibrium which is based on a simple ex post rationality principle along with an equilibrium condition predicts the pull to center bias and other more subtle observations in the laboratory newsvendor game

the predictive validity of prospect theory versus expected utility in health utility measurement most health care evaluations today still assume expected utility even though the descriptive deficiencies of expected utility are well known prospect theory is the dominant descriptive alternative for expected utility this paper tests whether prospect theory leads to better health evaluations than expected utility the approach is purely descriptive we explore how simple measurements together with prospect theory and expected utility predict choices and rankings between more complex stimuli for decisions involving risk prospect theory is significantly more consistent with rankings and choices than expected utility this conclusion no longer holds when we use prospect theory utilities and expected utilities to predict intertemporal decisions the latter finding cautions against the common assumption in health economics that health state utilities are transferable across decision contexts our results suggest that the standard gamble and algorithms based on should not be used to value health

the impact of improved mileage on gasoline consumption a simple two equation model is presented of the short run derived demand for gasoline that incorporates both the effect of price and income on attained fuel efficiency and at the same time the effect of price income and attained fuel efficiency on miles traveled the results of this effort have provided 1 further evidence regarding the price and income elasticities of gasoline demand and more importantly 2 the first reported estimate of the short run mileage elasticity of gasoline demand these findings are important in determining appropriate and effective policies for reducing gasoline consumption in that they influence the relative effectiveness of such policies as excise taxes versus fuel efficiency standards 9 references 3 tables

is there one unifying concept of utility an experimental comparison of utility under risk and utility over time the nature of utility is controversial whereas decision theory commonly assumes that utility is context specific applied and empirical decision analysis typically assumes one unifying concept of utility applicable to all decision problems this controversy has hardly been addressed empirically because of the absence of methods to measure utility outside the context of risk we introduce a method to measure utility over time and compare utility under risk and utility over time we distinguish between gains and losses and also measure loss aversion in two experiments we found that utility under risk and utility over time differed and were uncorrelated utility under risk was more curved than utility over time subjects were loss averse both for risk and for time but loss aversion was more pronounced for risk loss aversion over risk and time were uncorrelated this suggests that loss aversion although important in both decision contexts is volatile and subject to framing

are markets with loss averse consumers more sensitive to losses behavioral pricing and revenue management aim to incorporate realistic consumer behavior into firms pricing and inventory models the key input to these models is market demand which is often assumed to inherit the characteristics of consumer behavior as when for example one assumes that a market consisting of loss averse consumers is more responsive to losses than to gains yet market demand and consumer behavior need not be related and so we argue that approach to modeling market demand is misguided this paper proposes an approach that accounts for the heterogeneity in consumer valuation we aggregate the demand of individual loss averse consumers to obtain market demand and show that market demand may be more responsive to gains or losses or it may be equally responsive our results have profound implications not only for how best to characterize the market demand of behaviorally biased consumers but also for determining the firm s optimal pricing policy this paper was accepted by serguei net

loss aversion and labor supply in many occupations workers labor supply choices are constrained by institutional rules regulating labor time and effort provision this renders explicit tests of the neoclassical theory of labor supply difficult here we present evidence from studies examining labor supply responses in neoclassical environments in which workers are free to choose when and how much to work despite the favorable environment the results cast doubt on the neoclassical model they are however consistent with a model of reference dependent preferences exhibiting loss aversion and diminishing sensitivity jel j22 b49

modeling loss aversion and reference dependence effects on brand choice based upon a recently developed multiattribute generalization of prospect theory s value function tversky and kahneman 1991 we argue that consumer choice is influenced by the position of brands relative to multiattribute reference points and that consumers weigh losses from a reference point more than equivalent sized gains loss aversion we sketch implications of this model for understanding brand choice we develop a multinomial logit formulation of a reference dependent choice model calibrating it using scanner data in addition to providing better fit in both estimation and forecast periods than a standard multinomial logit model the model s coefficients demonstrate significant loss aversion as hypothesized we also discuss the implications of a reference dependent view of consumer choice for modeling brand choice demonstrate that loss aversion can account for asymmetric responses to changes in product characteristics and examine other implications for competitive strategy

a general equilibrium assessment of rebound effects in this paper we use a general equilibrium model applied to a national economy norway to explore the potential for energy efficiency improvements to trigger economic forces that offset potential savings from using more efficient technologies rebound effects two types of energy efficiency improvements electricity and oil are introduced into various sectors of the economy our results suggest significant and surprising differences across sectors concerning both energy use and consequences for the build up of greenhouse gases rebound effects are found to be quite significant for manufacturing sectors since long term consumption of energy undergoes minor reductions or increases in response to efficiency improvements in other sectors rebound effects appear to be weak or almost absent

investment horizon and the attractiveness of investment strategies a behavioral approach we analyze the attractiveness of investment strategies over a variety of investment horizons from the viewpoint of an investor with preferences described by cumulative prospect theory cpt currently the most prominent descriptive theory for decision making under uncertainty a bootstrap technique is applied using historical return data of 1926 2008 to allow for variety in investors preferences we conduct several sensitivity analyses and further provide robustness checks for the results in addition we analyze the attractiveness of the investment strategies based on a set of experimentally elicited preference parameters our study reveals that strategy attractiveness substantially depends on the investment horizon while for almost every preference parameter combination a bond strategy is preferred for the short run stocks show an outperformance for longer horizons portfolio insurance turns out to be attractive for almost every investment horizon interestingly we find probability weighting to be a driving factor for insurance strategies attractiveness

prospect theory in the health domain a quantitative assessment it is well known that expected utility eu has empirical deficiencies cumulative prospect theory cpt has developed as an alternative with more descriptive validity however cpt s full function had not yet been quantified in the health domain this paper is therefore the first to simultaneously measure utility of life duration probability weighting and loss aversion in this domain we observe loss aversion and risk aversion for gains and losses which for gains can be explained by probabilistic pessimism utility for gains is almost linear for losses we find less weighting of probability 1 2 and concave utility this contrasts with the common finding of convex utility for monetary losses however cpt was proposed to explain choices among lotteries involving monetary outcomes life years are arguably very different from monetary outcomes and need not generate convex utility for losses moreover utility of life duration reflects discounting causing concave utility

loss aversion in a consumption savings model abstract we propose a model of consumption and saving based on kahneman and tversky s prospect theory that implies a fundamental asymmetry in consumption behavior inconsistent with other models of consumption when there is sufficient income uncertainty a person resists lowering consumption in response to bad news about future income this resistance is greater than the resistance to increasing consumption in response to good news we present empirical evidence from five countries that confirms this behavior

experienced vs described uncertainty do we need two prospect theory specifications this paper reports on the results of an experimental elicitation at the individual level of all prospect theory components i e utility loss aversion and weighting functions in two decision contexts situations where alternatives are described as probability distributions and situations where the decision maker must experience unknown probability distributions through sampling before choice for description based decisions our results are fully consistent with prospect theory s empirical findings under risk furthermore no significant differences are detected across contexts as regards utility and loss aversion whereas decision weights exhibit similar qualitative properties across contexts typically found under prospect theory our data suggest that for gains at least the subjective treatment of uncertainty in experience based and description based decisions is significantly different more specifically we observe a less pronounced overweighting of small probabilities and a more pronounced underweighting of moderate and high probabilities for experience based decisions on the contrary for losses no significant differences were observed in the evaluation of prospects across contexts this paper was accepted by george wu decision analysis

paying is believing the effect of costly information on bayesian updating the supposed irrelevance of historical costs for rational decision making has been the subject of much interest in the economic literature in this paper we explore whether individual decision making under risk is affected by the cost of information to do so one must distinguish the effect of cost from self selection by individuals who value information the most outside of the laboratory it is difficult to disentangle these two effects we thus create an experimental environment where subjects are o ered additional useful and identical information on the state of the world across treatments we find a systematic effect of sunk costs on the manner in which subjects update their beliefs subjects over weigh costly information relatively to free information which results in a push of beliefs towards the extremes this shift does not necessarily lead to behavior more attuned with bayesian updating we find that an intensification of representativeness bias due to cost is the most likely explanation of our results

exploring the diffusion of low energy houses an empirical study in the european union abstract diffusion of low energy houses is an important part of energy and climate policy in the european union eu and in individual eu countries key barriers to the adoption of low energy houses include additional construction costs and uncertainty surrounding actual energy and cost savings in this paper we econometrically analyze determinants of low energy house adoption including time and risk preferences we rely on original data from a large survey conducted among households in eight eu countries to our knowledge this is the first empirical study of low energy building adoption to rely on a demographically representative sample our set of covariates includes parameters of time and risk preferences that were elicited via state of the art incentivized multiple price list experiments and via self assessment scales we find mixed results for the effects of time discounting on low energy house adoption risk preferences do appear to matter as risk proneness increases so does the adoption of zero net or energy plus building but not passive houses consistent with the low cost hypothesis about environmental attitude and action we find no results for environmental attitudes and social norms

a large scale test of the effects of time discounting risk aversion loss aversion and present bias on household adoption of energy efficient technologies abstract this paper empirically and jointly analyses the relations between standard time discounting risk aversion loss aversion and present bias and household stated adoption of low to high stake energy efficiency technologies eets light emitting diodes leds energy efficient appliances and retrofit measures the analysis relies on a large representative sample drawn from eight european union countries preferences over time risk and losses were elicited and jointly estimated from participant choices in incentivized context free multiple price list experiments the findings from econometrically estimating eet adoption equations provide some support for the hypothesis that individuals who are more loss averse or more risk averse or who exhibit a lower time discount factor are less likely to have adopted eets yet some of the results significance levels and effect sizes appeared sensitive to the addition of covariates which may be an indication of bad controls finally omitting one or several of the parameters capturing preferences over time risk and losses when estimating the eet adoption equations did not appear to cause omitted variable bias

uncertainty and the employment dynamics of small and large businesses we examine the impact of uncertainty on employment dynamics alternative measures of uncertainty are constructed based on the survey of professional forecasters and regression based forecasting models for gdp growth inflation sp the impact on large businesses are generally non existent or weaker our results suggest that to truly understand the effects of uncertainty on employment dynamics we need to focus on the relatively smaller and entrepreneurial businesses we discuss implications for the framing of economic policy

international experience on incentive program in support of fuel economy standards and labelling for motor vehicle a comprehensive review abstract the road transports especially the motor vehicles play a significant role in increment of energy consumption in the transportation sector however the harmful greenhouse gas ghg emissions from such vehicles which are the main causes of global warming have been increased as well one of the effective solutions to reduce the growth rate of energy consumption is the implementation of fuel economy standard and label other countries experiences indicate that the program is very beneficial for society environment and government the hierarchy of the program consists of the test procedure fuel economy standards fuel economy label and incentive program as a peak of the program reviews of the fuel economy standard can be found in many references however a few papers deal with the incentive program specifically therefore this paper aims to give a review on the implementation of the incentive program globally in support of fuel economy standard and label for the motor vehicles finally as the incentive program is necessary to support fuel economy standard and label it should be applied to the motor vehicles as soon as possible

how loss averse are investors in financial markets abstract we investigate loss aversion in financial markets using a typical asset allocation problem our theoretical and empirical results show that investors in financial markets are more loss averse than assumed in the literature moreover loss aversion changes depending on market conditions investors become far more loss averse during bull markets than during bear markets indicating their more profound disutility for losses when others enjoy gains contrary to most previous results we find that investors are more sensitive to changes in losses than changes in gains

contract preferences and performance for the loss averse supplier buyback vs revenue sharing prior theory claims that buyback and revenue sharing contracts achieve equivalent channel coordinating solutions when applied in a dyadic supplier retailer setting this suggests that a supplier should be indifferent between the two contracts however the sequence and magnitude of costs and revenues i e losses and gains vary significantly between the contracts suggesting the supplier s preference of contract type and associated contract parameter values may vary with the level of loss aversion we investigate this phenomenon through two studies the first is a preliminary study investigating whether human suppliers are indeed indifferent between these two contracts using a controlled laboratory experiment with human subjects taking on the role of the supplier having to choose between contracts we find that contract preferences change with the ratio of overage and underage costs for the channel i e the newsvendor critical ratio in particular a buyback contract is preferred for products wit

risk aversion and expected utility theory a calibration theorem within the expected utility framework the only explanation for risk aversion is that the utility function for wealth is concave a person has lower marginal utility for additional wealth when she is wealthy than when she is poor this paper provides a theorem showing that expected utility theory is an utterly implausible explanation for appreciable risk aversion over modest stakes within expected utility theory for any concave utility function even very little risk aversion over modest stakes implies an absurd degree of risk aversion over large stakes illustrative calibrations are provided

covered interest arbitrage profits the role of liquidity and credit risk we study the profitability of covered interest parity cip arbitrage violations and their relationship with market liquidity and credit risk using a novel and unique dataset of tick by tick firm quotes for all financial instruments involved in the arbitrage strategy the empirical analysis shows that positive cip arbitrage deviations include a compensation for liquidity and credit risk once these risk premia are taken into account small arbitrage profits only accrue to traders who are able to negotiate low trading costs the results are robust to stale pricing and the nonsynchronous trading occurring in the markets involved in the arbitrage strategy

catastrophic medical expenditure risk we propose a measure of household exposure to particularly onerous medical expenses the measure can be decomposed into the probability that medical expenditure exceeds a threshold the loss due to predictably low consumption of other goods if it does and the further loss arising from the volatility of medical expenses above the threshold depending on the choice of threshold the measure is consistent with a model of reference dependent utility with loss aversion unlike the risk premium the measure is only sensitive to particularly high expenses and can identify households that expect to incur such expenses and would benefit from subsidised but not actuarially fair insurance an empirical illustration using data from seven asian countries demonstrates the importance of taking account of informal insurance and reveals clear differences in catastrophic medical expenditure risk across and within countries in general risk is higher among poorer rural and chronically ill populations

expo power utility a flexible form for absolute and relative risk aversion a new utility function which i call expo power is proposed that exhibits decreasing constant or increasing absolute risk aversion and decreasing or increasing relative risk aversion depending on parameter values numerical analysis suggests that the expo power function performs well in incorporating these risk preference structures and that arbitrary risk preference specifications may lead to biased risk response estimates

expectations information and migration the case of the west bank and gaza this study evaluates the determinants of palestinian migration from the west bank and gaza data are employed for the post 1967 period of israeli rule to specify and test competing models as well as the structure of expectations in the migration decision results of the analysis support a simple static expectation formulation as is consistent with much of the short term low mobility cost migration between the west bank and jordan findings further point to the importance of various israeli palestinian economic and political economic interactions in the determination of this controversial movement of population including those associated with employment opportunity for palestinian labour in israel elements of israeli west bank settlement policy and changes in local standard of living various policy implications of the research are indicated

designing incentive systems for truthful forecast information sharing within a firm we consider a firm where the sales division sales is responsible for demand forecasting and the operations division operations is responsible for ordering sales has better information about the demand than operations and sends a nonbinding demand forecast to operations to incentivize truthful information sharing we include a forecast error penalty in the incentive system of sales besides monetary payoffs we also add behavioral factors to the utility function of sales we model the setting as a signaling game and derive the pareto dominant separating equilibria of the game in laboratory experiments we observe human behavior that is in line with the predictions of the behavioral model but deviates substantially from expected payoff maximizing behavior we use the behavioral model to design incentive systems for truthful information sharing and validate the approach in an experiment with out of sample treatments and out of sample subjects we conduct additional experiments to provide further robus

loss aversion and adaptation in the labor market empirical indifference functions and labor supply this paper presents empirically determined indifference functions for income and leisure which exhibit the phenomena of loss aversion and a utility reference point determined by adaptation as expounded by kahneman and tversky and others data for this study were gathered in original surveys of seven diverse labor markets the indifference functions of all show common features consistent with loss aversion adaptation these features help explain stability in labor markets in the face of an overtime premium which prevents the many workers in the united states from being at an optimal equilibrium and causes discontinuities in labor supply curves labor supply curves derived from indifference curves with the loss aversion adaptation features have much smaller discontinuities than those based on simulated curves without these features copyright 1996 by mit press

market specific and currency specific risk during the global financial crisis evidence from the interbank markets in tokyo and london abstract this paper investigates how international money markets reflected credit and liquidity risk during the global financial crisis after matching the currency denomination we examine how the tokyo interbank offered rate tibor was synchronized with the london interbank offered rate libor we find remarkably asymmetric responses in market specific and currency specific risk during the crisis the regression results suggest that market specific credit risk increased the difference across markets whereas liquidity risk caused the difference across currency denominations they also support the view that liquidity shortage of the us dollar occurred in international money markets during the crisis coordinated central bank liquidity provisions were useful in reducing the liquidity shortage of the us dollar but their effectiveness was asymmetric across markets

exchange economies and loss exposure experiments exchange economies were created in which individuals faced losses if people are risk seeking in the losses as predicted by prospect theory then due to the nonconvexity the competitive equilibria are all on the boundaries of the edgeworth box the experimental results are that risk seeking behavior is observed in many people and appears in markets as predicted in addition market behavior is consistent with answers to hypothetical questionnaires contrary to prospect theory risk seeking seems to diminish with experience preferences in the market setting are not labile and risk seeking preferences are not simply a result of framing effects copyright 1997 by american economic association

health insurance choice and risk preferences under cumulative prospect theory an experiment we investigate how consumers choose insurance contracts when using a measure of decision quality based on individual risk preferences for this we use a laboratory experiment with a sequential design first subjects face insurance choices then we elicit risk preferences allowing for different latent decision making theories i e cumulative prospect theory and expected utility theory we find that the vast majority are cumulative prospect theory types analyzing whether subjects choose contracts consistent with their risk preferences we find that about 14 of all participants show inconsistent behavior and low decision quality yet the majority shows consistent behavior and good decision quality our results suggest that one explanation for inconsistent choices is the application of heuristics

loss aversion and lying behavior abstract we theoretically show that loss averse agents are more likely to lie to avoid receiving a low payoff after a random draw the lower the ex ante probability of this bad outcome the ex ante expected payoff increases as the bad outcome becomes less likely and hence the greater is the loss avoided by lying we demonstrate robust support for this theory by reanalyzing the results from the extant literature and with a new experiment that varies the outcome probabilities and is run double anonymous

bang for the buck gain loss ratio as a driver of judgment and choice prominent decision making theories propose that individuals should evaluate alternatives by combining gains and losses in an additive way instead we suggest that individuals seek to maximize the rate of exchange between positive and negative outcomes and thus combine gains and losses in a multiplicative way sensitivity to gain loss ratio provides an alternative account for several existing findings and implies a number of novel predictions it implies greater sensitivity to losses and risk aversion when expected value is positive but greater sensitivity to gains and risk seeking when expected value is negative it also implies more extreme preferences when expected value is positive than when expected value is negative these predictions are independent of decreasing marginal sensitivity loss aversion and probability weighting three key properties of prospect theory five new experiments and reanalyses of two recently published studies support these predictions this paper was accepted by yuval ro

negative voters electoral competition with loss aversion this paper studies how voter loss aversion affects electoral competition in a downsian setting assuming that the voters reference point is the status quo we show that loss aversion has a number of effects first for some values of the status quo there is policy rigidity both parties choose platforms equal to the status quo regardless of other parameters second there is a moderation effect when there is policy rigidity the equilibrium policy outcome is closer to the moderate voters ideal point than in the absence of loss aversion in a dynamic extension of the model we consider how parties strategically manipulate the status quo to their advantage and we find that this increases policy rigidity finally we show that with loss aversion incumbents adjust less than challengers to changes in voter preferences the underlying force is that the status quo works to the advantage of the incumbent this prediction of asymmetric adjustment is new and we test it using elections to us state legislatures the results are as predicted incumbent parties respond less to shocks in the preferences of the median voter

aspiring to succeed a model of entrepreneurship and fear of failure fear of failure can dominate the choices of individuals we model its role in the decision to become an entrepreneur and subsequent investments made in pursuit of success using the framework of loss aversion we show that when an individual s threshold for success is sufficiently high fear of failure motivates additional investment when the threshold for success is equal to the foregone outside option on the other hand fear of failure is always de motivating finally regardless of the success threshold fear of failure is negatively associated with entry into entrepreneurship our findings highlight the importance of the interaction between the degree of fear of failure and the aspirations of the would be entrepreneur

depressed demand for crop insurance contracts and a rationale based on third generation prospect theory when actuarially fair insurance for a major risk is available then standard economic theory posits that those subject to the risk should insure in agriculture it is common for producers to decline contract offers where presubsidy premiums just cover average losses and subsidies are substantial this paper seeks to shed light on why demand is curtailed in a mail survey of u s corn and soybean producers we solicited willingness to pay wtp for actuarially fair insurance at different coverage levels we find demand to be so low that median wtp is no larger than fair premium when adjusted down by current subsidy rates which pay for one half or more of most premium charges wtp as a share of the fair rate is especially low when risk of loss is high there is limited evidence that respondents appreciate the convex relationship between coverage level and expected indemnity payoff third generation prospect theory is shown to be consistent with observed findings in particular a strong distaste for paying premium can be rationalized by loss aversion furthermore when high revenue outcomes are more likely than not that is negative skewness then higher loss aversion greater decision weight distortions and greater risk aversion will decrease wtp

risk preferences and demand drivers of extended warranties we disentangle and study the relative importance of different risk preferences in explaining extended warranty purchases and the high premia paid for them empirical and behavioral research on insurance is at odds with whether diminishing returns curvature of the utility function or loss aversion and nonlinear probability weighting lead to observed consumer behavior this lack of consensus is primarily due to the inability of standard choice data to separate different risk preferences and the consequent need to rely on strong parametric assumptions we design two conjoint studies consistent with simultaneous and sequential decision making with choices about washing machines and extended warranties where subjects are given failure probabilities and repair costs using stated choice data from the surveys we can nonparametrically identify product and risk preferences we find that loss aversion is significantly more important than curvature and probability weights in explaining extended warranty choices importantly failure to decompose risk averse behavior into that arising from curvature loss aversion and probability weighting leads to lower washer prices and profits these findings are robust to alternate reference point assumptions we rationalize the premia paid for warranties by exploring retailer incentives to price discriminate and test the theory on complementary goods pricing finally based on counterfactual analysis forcing separate retailers to sell washers and extended warranties is not necessarily welfare enhancing as cited in the media and previous literature

risk taking for oneself and others a structural model approach economic theory makes no predictions about social factors affecting decisions under risk we examine situations in which a decision maker decides for herself and another person under conditions of payoff equality and compare them to individual decisions by estimating a structural model we find that responsibility leaves utility curvature unaffected but accentuates the subjective distortion of very small and very large probabilities for both gains and losses we also find that responsibility reduces loss aversion but that these results only obtain under some specific definitions of the latter these results serve to generalize and reconcile some of the still largely contradictory findings in the literature they also have implications for financial agency which we discuss

loss aversion in aggregate macroeconomic time series abstract prospect theory has been the focus of increasing attention in many fields of economics however it has scarcely been addressed in macroeconomic growth models neither on theoretical nor on empirical grounds in this paper we use prospect theory in a stochastic optimal growth model thereafter the focus lies on linking the euler equation obtained from a prospect theory growth model of this kind to real macroeconomic data we will use generalized method of moments gmm estimation to test the implications of such a non linear prospect utility euler equation our results indicate that loss aversion can be traced in aggregate macroeconomic time series

eliciting prospect theory when consequences are measured in time units time is not money we elicited the prospect theory components utility probability weighting and loss aversion when consequences are expressed as the time dedicated to a specific task or activity a similar elicitation was performed for monetary consequences to allow an across attribute time money comparison of the elicited components at the individual level we obtained less concave utility and smaller loss aversion for time than for money moreover while the probability weighting was predominantly inverse s shaped for both attributes it was less sensitive to probabilities and more elevated for time than for money this finding implies more optimism for gains and more pessimism for losses this paper was accepted by peter wakker decision analysis

the shape of utility functions and organizational behavior based on measurements among 332 owner managers we investigate how theglobal shape of the utility function i e s shaped versus concave or convex over the total range of outcomes relates to choice behavior we find that the global shape of the utility function differs across decision makers about one third of the owner managers exhibit an s shaped utility function and that the global shape is linked to organizational behavior i e the production system employed a result that does not change when using different methods to identify the decision maker s global shape of the utility function the decision maker s risk attitude risk averse or risk seeking does not affect the choice of the production system whereas the degree of risk aversion based on thelocal shape of the utility function may be important in explaining owner managers trading behavior pennings and smidts 2000 more structural organizational behavior appears to be linked to theglobal shape of the utility function

the conflict between energy conservation and environmental policy in the us transportation sector abstract the us environmental protection agency epa implements its policy of pollution control in the transportation sector by specifying the amount of emission permitted per mile driven rather than per gallon of fuel burnt as a result since car manufacturers have no incentive to reduce emissions below the standard unless the number of miles travelled declines vehicle emissions will not drop no matter how much or how little fuel is burnt some of the major fuel conservation policies that have been implemented in the usa have led to increased fuel economy and have resulted in reduced demand for petrol but they have also indirectly encouraged a greater demand for travel consequently vehicle emissions have increased even though the amount of fuel consumption has decreased the net effect is that us energy conservation policy is at loggerheads with pollution control policy when the two should be going hand in hand

eliciting von neumann morgenstern utilities when probabilities are distorted or unknown this paper proposes a new method the gamble tradeoff method for eliciting utilities in decision under risk or uncertainty the elicitation of utilities to be used in the expected utility criterion turns out to be possible even if probabilities are ambiguous or unknown a disadvantage of the tradeoff method is that a few more questions usually must be asked to clients also the lotteries that are needed are somewhat more complex than in the certainty equivalent method or in the probability equivalent method the major advantage of the tradeoff method is its robustness against probability distortions and misconceptions which constitute a major cause of violations of expected utility and generate inconsistencies in utility elicitation thus the tradeoff method retains full validity under prospect theory rank dependent utility and the combination of the two i e cumulative prospect theory the tradeoff method is tested for monetary outcomes and for outcomes describing life duration we find higher risk aversion for life duration but the tradeoff method elicits similar curvature of utility apparently the higher risk aversion for life duration is due to more pronounced deviations from expected utility

developments in non expected utility theory the hunt for a descriptive theory of choice under risk this article reviews recent developments in the economic theory of individual decision making under risk since the 1950s it has been known that individual choices violate the standard model of expected utility in predictable ways considerable research effort has now been devoted to the project of developing a superior descriptive model following an overview of non expected utility theories which distinguishes between conventional and non conventional approaches the paper seeks to assess these alternative models in terms of empirical success using laboratory and field data and theoretical usefulness the closing sections reflect on some new directions emerging in this literature

can prospect theory be used to predict an investor s willingness to pay abstract cumulative prospect theory cpt is widely considered to be the most successful descriptive theory for decision making under risk and uncertainty sophisticated methods have been developed to reliably elicit cpt parameters on an individual basis the aim of this paper is to analyze whether such methods are suited to be applied in real world situations particularly in the context of investment counseling for retail investors specifically we examine whether cpt parameters elicited via standardized computer tools are successful in predicting an individual s preference for different structured financial products surprisingly we find only low predictive power of the elicited cpt parameters on the wtp using a second set of experiments we examine possible explanations for the low prediction quality overall we have to conclude that it is too much of a leap to draw conclusions about the attractiveness of complex financial products from cpt parameters elicited via simple lotteries

differentiated price loss aversion in destination choice the effect of tourists cultural interest abstract this article looks into the differentiated effects of loss aversion depending on whether individuals show cultural interest when choosing a destination based on the fact that perceived value implies not only sacrifices but also the expectations of a certain level of quality and prospects of satisfaction together with the idea the prospect theory applies to tourism prices the article states the hypothesis that interest in culture when choosing a destination lowers people s loss aversion by incorporating the reference dependent model into a multinomial logit model with random parameters which controls for heterogeneity the empirical application shows that culture interested tourists are less loss averse i e the negative effect of finding a higher than expected price diminishes with cultural interest the expectation of enjoyment of these attributes and the more conscious attitude toward maintenance restoration activities of cultural sites are hypothesized to lead prices to be evaluated differently when selecting a destination

portfolio optimization under loss aversion abstract we present an integrated methodological approach for selecting portfolios the proposed methodology is focused on incorporation of investor s preferences in the mean risk framework we propose a risk measure calculated with the downside part of the portfolio return distribution which we argue captures better the practical behavior of the loss averse investor we establish its properties study the link with stochastic dominance criteria point out the relations with conditional value at risk and lower partial moment of first order and give the explicit formula for the case of scenario based portfolio optimization the proposed methodology involves two stages firstly the investment opportunity set efficient frontier is determined and secondly one single preferred efficient portfolio is selected namely the one having the highest expected utility value three classes of utility functions with loss aversion corresponding to three types of investors are considered the empirical study is targeted on assessing the differences between the efficient frontier of the proposed model and the classical mean variance mean cvar and mean lpm1 frontiers we firstly analyze the loss of welfare incurred by using another model instead of the proposed one and measure the corresponding gain loss of utility secondly we assess how much the portfolios really differ in terms of their compositions using a dissimilarity index based on the 1 norm we describe and interpret the optimal solutions obtained and emphasize the role and influence of loss aversion parameters values and of constraints three types of constraints are studied no short selling allowed a certain degree of diversification imposed and short selling allowed

a policy utility dislocation model based on prospect theory a case study of promoting policies with low carbon lifestyle abstract a low carbon lifestyle is an inevitable choice for mitigating climate change however in the actual situation where policy makers and policy target groups are separated from each other low carbon lifestyle changes are often manifested as individual strong government actions behind which social actions are seriously lagging based on this observation in this study a concept of policy utility dislocation was developed and a policy utility dislocation model was constructed based on prospect theory numerical simulation showed that policy utility dislocation can be reduced by increasing the proportion of residents environmental benefits government efforts and subsidies and reducing the cost of implementing a low carbon lifestyle for residents in particular when the environmental benefits of the government and residents accounted for 15 and 65 respectively or the subsidy coefficient was 2 the policy utility dislocation became zero in addition policy utility dislocation began to appear when the cost of implementing a low carbon lifestyle exceeded 3 this study enriches the connotation of policy utility and quantifies the policy utility dislocation and provides new ways to launch policies that promote low carbon lifestyles

preference reversals for ambiguity aversion this paper finds preference reversals in measurements of ambiguity aversion even if psychological and informational circumstances are kept constant the reversals are of a fundamentally different nature than the reversals found before because they cannot be explained by context dependent weightings of attributes we offer an explanation based on sugden s random reference theory with different elicitation methods generating different random reference points then measurements of ambiguity aversion that use willingness to pay are confounded by loss aversion and hence overestimate ambiguity aversion this paper was accepted by teck ho decision analysis

an index of loss aversion to a considerable extent risk aversion as it is commonly observed is caused by loss aversion several indexes of loss aversion have been proposed in the literature the one proposed in this paper leads to a clear decomposition of risk attitude into three distinct components basic utility probability weighting and loss aversion the index is independent of the unit of payment the main theorem shows how the indexes of different decision makers can be compared through observed choices

loss aversion in politics we study how loss aversion affects the political equilibrium in a simple majority voting model first we show a status quo bias which leads to path dependence second loss aversion implies a moderating effect on the most extreme voters third in a dynamic setting the effect of loss aversion diminishes with the length of the planning horizon of voters however in the presence of a projection bias majorities are partially unable to understand how fast they will adapt to a new policy this makes changes less likely and induces time inconsistency policy changes are timid at the beginning while in later periods they are made progressively more radical fourth in a stochastic environment loss aversion yields a significant distaste for risk but also a smaller attachment to the status quo the application of these results to a model of redistribution leads to empirically plausible implications

from turmoil to crisis dislocations in the fx swap market before and after the failure of lehman brothers abstract this paper investigates dislocations in the foreign exchange fx swap market between the us dollar and three major european currencies after the failure of lehman brothers in september 2008 deviations from covered interest parity cip were negatively associated with the creditworthiness of us financial institutions as well as that of european institutions consistent with the deepening of a dollar liquidity problem into a global phenomenon us dollar term funding auctions by the ecb snb and boe as well as the us federal reserve commitment to provide unlimited dollar swap lines are found to have ameliorated the fx swap market dislocations

relative concave utility for risk and ambiguity this paper presents a general technique for comparing the concavity of different utility functions when probabilities need not be known it generalizes a yaari s comparisons of risk aversion by not requiring identical beliefs b kreps and porteus information timing preference by not requiring known probabilities c klibanoff marinacci and mukerji s smooth ambiguity aversion by not using subjective probabilities which are not directly observable and by not committing to violations of dynamic decision principles d comparative smooth ambiguity aversion by not requiring identical second order subjective probabilities our technique completely isolates the empirical meaning of utility it thus sheds new light on the descriptive appropriateness of utility to model risk and ambiguity attitudes

monetary policy and covered interest parity in the post gfc period evidence from the australian dollar and the nz dollar abstract after the global financial crisis gfc most major currencies had higher interest rates than the us dollar on forward contract because of increased demand for the us dollar as international liquidity however unlike the other major currencies the australian dollar and the nz dollar had lower interest rates than the us dollar on forward contract in the post gfc period the purpose of this paper is to explore why this happened through estimating the covered interest parity cip condition in the analysis we focus on a unique feature of australia and new zealand where short term interest rates remained significantly positive even after the gfc the paper first constructs a theoretical model where increased liquidity risk causes deviations from the cip condition it then tests this theoretical implication by using daily data of six major currencies we find that both money market risk measures and policy rates had significant effects on the cip deviations the result implies that unique monetary policy feature in australia and new zealand made deviations from the cip condition distinct on the forward contract

labor supply of new york city cabdrivers one day at a time life cycle models of labor supply predict a positive relationship between hours supplied and transitory changes in wages because such changes have virtually no effect on life cycle wealth previous attempts to test this hypothesis empirically with time series data have not been supportive estimated elasticities are typically negative or nonsignificant such analyses however are vulnerable to measurement error and other estimation problems we use data on daily observations of wages and hours for new york city cab drivers to estimate the supply response to transitory fluctuations in wages cab drivers decide daily how many hours to supply and face wages that are positively correlated within days but largely uncorrelated between days using these data our central finding is that wage elasticities are persistently negative from 5 to 1 in three different samples even after correcting for measurement error using instrumental variables these negative wage elasticities challenge the notion that cab drivers trade off labor and leisure at different points in time and question the empirical adequacy of life cycle formulations of labor supply

central bank swap line effectiveness during the euro area sovereign debt crisis abstract the federal reserve re established a swap line with the european central bank in response to the international liquidity stresses created by the euro area sovereign debt crisis we examine the swap line s effectiveness in addressing these stresses in 2010 11 we find that announcements about the swap line had a significant effect in reducing euro dollar fx swap spreads during the 2010 11 crisis but that the swap line only had limited effectiveness in alleviating the stresses probably owing to some stigma being attached to its use

risk uncertainty and entrepreneurship evidence from a lab in the field experiment theory predicts that entrepreneurs have distinct attitudes toward risk and uncertainty but empirical evidence is mixed to better understand the unique behavioral characteristics of entrepreneurs and the causes of these mixed results we perform a large lab in the field experiment comparing entrepreneurs to managers a suitable comparison group and employees n 2 288 the results indicate that entrepreneurs perceive themselves as less risk averse than managers and employees in line with common wisdom however when using experimental incentivized measures the differences are subtler entrepreneurs are only found to be unique in their lower degree of loss aversion and not in their risk or ambiguity aversion this combination of results might be explained by our finding that perceived risk attitude is not only correlated to risk aversion but also to loss aversion overall we therefore suggest using a broader definition of risk that captures this unique feature of entrepreneurs their willingness to risk losses this paper was accepted by uri gneezy behavioral economics

dynamic pricing with loss averse consumers and peak end anchoring we study the dynamic pricing implications of a new behaviorally motivated reference price mechanism based on the peak end memory mode this model suggests that consumers anchor on a reference price that is a weighted average of the lowest and most recent prices loss averse consumers are more sensitive to perceived losses than gains relative to this reference price we find that a range of constant pricing policies is optimal for the corresponding dynamic pricing problem this range is wider the more consumers anchor on lowest prices and it persists when buyers are loss neutral in contrast with previous literature in a transient regime the optimal pricing policy is monotone and converges to a steady state price which is lower the more extreme and salient the low price anchor is our results suggest that behavioral regularities such as peak end anchoring and loss aversion limit the benefits of varying prices and caution that the adverse effects of deep discounts on the firm s optimal prices and profits might be more enduring than previous models predict

loss aversion under prospect theory a parameter free measurement agrowing body of qualitative evidence shows that loss aversion a phenomenon formalized in prospect theory can explain a variety of field and experimental data quantifications of loss aversion are however hindered by the absence of a general preference based method to elicit the utility for gains and losses simultaneously this paper proposes such a method and uses it to measure loss aversion in an experimental study without making any parametric assumptions thus it is the first to obtain a parameter free elicitation of prospect theory s utility function on the whole domain our method also provides an efficient way to elicit utility midpoints which are important in axiomatizations of utility several definitions of loss aversion have been put forward in the literature according to most definitions we find strong evidence of loss aversion at both the aggregate and the individual level the degree of loss aversion varies with the definition used which underlines the need for a commonly accepted definition of loss aversion