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This paper presents the results of an experiment that completely measures the utility function and probability weighting function for different positive and negative monetary outcomes, using a representative sample of N = 1935 from the general public. The results confirm earlier findings in the lab, suggesting that utility is less pronounced than what is found in classical measurements where expected utility is assumed. Utility for losses is found to be convex, consistent with diminishing sensitivity, and the obtained loss aversion coefficient of 1.6 is moderate but in agreement with contemporary evidence. The estimated probability weighing functions have an inverse-S shape and they imply pessimism in both domains. These results show that probability weighting is also an important phenomenon in the general population. Women and lower educated individuals are found to be more risk averse, in agreement with common findings. Unlike previous studies that ascribed gender differences in risk attitudes solely to differences in the degree utility curvature, however, our results show that this finding is primarily driven by loss aversion and, for women, also by a more pessimistic psychological response towards the probability of obtaining the best possible outcome.

Differences in the US & UK's approaches to minimizing military casualties & to protecting military forces are highlighted. It is contended that the US & UK strategies for reducing military casualties are representative of Western cultural preferences; eg, it is stated that military losses are routinely deplored & that military officers possess a moral & military obligation to preserve the lives of soldiers. However, it is subsequently asserted that Western cultural preferences could actually inhibit military effectiveness, damage public trust in government, & raise questions about the appropriateness of military action. Factors responsible for the predominance of casualty aversion within US military actions & for the presence of casualty tolerance in UK military strategies are then identified. It is concluded that Western nations, particularly the US, must dedicate more attention to offering strategic justifications for military casualties rather than providing tactical explanations for their occurrence in order to preserve public support for military actions. J. W. Parker

The attachment effect can hinder effective negotiation. Parties are influenced by their subjective expectations formed on account of the exchange of offers, they form reference points, and loss aversion potentially leads to a change of preferences when expectations change. This book presents a motivation, formalization, and substantiation of the attachment effect. The results can be used for prescriptive advice to negotiators.

We use data from the Panel Study of Income Dynamics to investigate how households' portfolio allocations change in response to wealth fluctuations. Persistent habits, consumption commitments, and subsistence levels can generate time-varying risk aversion with the consequence that when the level of liquid wealth changes, the proportion a household invests in risky assets should also change in the same direction. In contrast, our analysis shows that the share of liquid assets that households invest in risky assets is not affected by wealth changes. Instead, one of the major drivers of household portfolio allocation seems to be inertia: households rebalance only very slowly following inflows and outflows or capital gains and losses. (JEL D14, D31)

Using actual probabilities of audit and penalty rates, the return on evasion is 91–98%. So why do not most of us evade? Existing analysis, based on expected utility theory (EUT) is unable to explain this. Furthermore, and contrary to intuition and the bulk of evidence, EUT predicts that evasion should be decreasing in the tax rate (Yitzhaki puzzle). We apply Tversky and Kahneman's [Tversky, A., Kahneman, D., 1992. Advances in prospect theory: cumulative representation of uncertainty. Journal of Risk and Uncertainty 5, 297–323] cumulative prospect theory to tax evasion. We show that prospect theory provides a much more satisfactory account of tax evasion including an explanation of the Yitzhaki puzzle. This also provides independent confirmation of prospect theory.

Many papers in organization theory and strategy use prospect theory, but few derive their hypotheses from prospect theory's formal model. This paper develops a prospect theory model of resource allocation under risk where projects have both positive and negative adjusted payoffs. The model assumes consistent value (rather than profit) maximizing behavior and demonstrates how resources, risk propensity, and reference levels interact to determine allocations to risky projects. The analysis shows that prospect theory's parameters interact in complex ways to influence risk taking, which makes simple predictions difficult. Overall, loss aversion and the reference point dominate the results, with curvature of the value function playing a secondary role and the maximum risk aversion occurring for firms near their reference points, not for firms above their reference points.

Mainstream economists are reluctant to integrate features of bounded rationality into their behavioural assumptions. However, particularly in the field of economic policy the scope for irrational behaviour is given, since voters lack incentives for rational reasoning concerning their voting decision. The explanatory power of irrational behaviour is demonstrated for the example of reform resistance. Status quo preferences, endowment effects and loss aversion are typical deviations from full rationality and explain resistance against beneficial reforms even if there is full information. From this psychological perspective, a major precondition for the implementation of reforms is the loss of the status quo as an available option. This loss might result from changing external constraints caused by political integration (European Union) or market integration (globalisation). Test runs of policy options might also be helpful for overcoming psychological reform resistance.

The Truckers and Turnover Project is a statistical case study of a single firm and its employees which matches proprietary personnel and operational data to new data collected by the researchers to create a two-year panel study of a large subset of new hires. The project's most distinctive innovation is the data collection process which combines traditional survey instruments with behavioral economics experiments. The survey data include information on demographics, risk and loss aversion, time preference, planning, non-verbal IQ, and the MPQ personality profile. The data collected by behavioral economics experiments include risk and loss aversion, time preferences (discount rates), backward induction, patience, and the preference for cooperation in a social dilemma setting. Subjects will be followed over two years of their work lives. Among the major design goals are to discover the extent to which the survey and experimental measures are correlated, and whether and how much predictive power, with respect to key on-the-job outcome variables, is added by the behavioral measures. The panel study of new hires is being carried out against the backdrop of a second research component, the development of a more conventional in-depth statistical case study of the cooperating firm and its employees. This is a high-turnover service industry setting, and the focus is on the use of survival analysis to model the flow of new employees into and out of employment, and on the correct estimation of the tenure-productivity curve for new hires, accounting for the selection effects of the high turnover.

Portfolio choice by full‐scale optimization applies the empirical return distribution to a parameterized utility function, and the maximum is found through numerical optimization. Using a portfolio choice setting of three UK equity indices we identify several utility functions featuring loss aversion and prospect theory, under which full‐scale optimization is a substantially better approach than the mean–variance approach. As the equity indices have return distributions with small deviations from normality, the findings indicate much broader usefulness of full‐scale optimization than has earlier been shown. The results hold in‐ and out‐of‐sample, and the performance improvements are given in terms of utility as well as certainty equivalents.

Systematic asymmetries in exchange behavior have been widely interpreted as support for "endowment effect theory," an application of prospect theory positing that loss aversion and utility function kinks set by entitlements explain observed asymmetries. We experimentally test an alternative explanation, namely, that asymmetries are explained by classical preference theories finding influence through the experimental procedures typically used. Contrary to the predictions of endowment effect theory, we observe no asymmetries when we modify procedures to remove the influence of classical preference theories. When we return to traditional-type procedures, however, the asymmetries reappear. The results support explanations based in classical preference theories and reject endowment effect theory. (JEL D01)

Although the federal government dedicated nearly $40 billion to funding student loans in 2006, only 60 percent of potential students from low-income families attend college, compared with 90 percent from high-income families. This article argues that enrollment rates are lower than they could be because potential students undervalue loan subsidies, which are delivered after graduation instead of up front when a student enrolls and incurs costs. The behavioral economics concept of myopic loss aversion suggests that accelerating loan subsidies to the time of enrollment would increase their effectiveness as an incentive to enroll. Empirical studies also find a larger response to up-front subsidies such as grants than to delayed subsidies delivered after graduation such as loan forgiveness. ; The Hamilton Project

Psychologische Studien belegen vielfältige Abweichungen menschlicher Denk- und Verhaltensweisen von den üblichen Rationalitätsannahmen ökonomischer Modelle. Die traditionelle Ökonomie begegnet diesen Hinweisen begrenzter Rationalität mit Zurückhaltung, auch wenn derartige Ansätze inzwischen auf einzelnen Gebieten, wie etwa der Finanzmarktanalyse im Rahmen der Behavioural Finance Akzeptanz gewinnen. Um so mehr erstaunt es, dass psychologische Einsichten noch kaum Eingang in die Analyse der Wirtschaftspolitik gefunden haben, wo ja nicht einmal das Korrektiv der Märkte zur Rationalität zwingt. Der Wähler hat kaum Anreize zu einer rationalen Beurteilung wirtschaftspolitischer Programme, da seine individuelle Wahlentscheidung praktisch keinen Einfluss auf die Qualität der Wirtschaftspolitik hat. In der politökonomischen Analyse hat dies Kalkül unter dem Terminus der ?rationalen Ignoranz? einen festen Platz. Mit der gleichen Begründung, mit der ein geringer Informationsstand des Wählers für rational erklärt wird, kann nun aber auch die ?rationale Irrationalität? begründet werden: Kein Wähler wird individuell dafür bestraft, wenn er die Beurteilung wirtschaftspolitischer Optionen auf Basis angeborener Instinkte und nicht auf der Grundlage eines Rationalitätskalküls vornimmt. Wenn derartige Irrationalitäten schon eine hilfreiche Rolle zur Erklärung von Verhaltensweisen unter Marktbedingungen etwa im Rahmen der Behavioural Finance spielen, dann ist auch ein Erkenntnisbeitrag bei der Analyse wirtschaftspolitischer Verhaltensweisen zu erwarten. ; Mainstream economists are reluctant to integrate features of bounded rationality into their behavioural assumptions. However, particularly in the field of economic policy the scope for irrational behaviour is given, since voters lack incentives for rational reasoning concerning their voting decision. The explanatory power of irrational behaviour is demonstrated for the example of reform resistance. Status quo preferences, endowment effects and loss aversion are typical deviations from full rationality and explain resistance against beneficial reforms even if there is full information. From this psychological perspective, a major precondition for the implementation of reforms is the loss of the status quo as an available option. This loss might result from changing external constraints caused by political integration (European Union) or market integration (globalisation). Test runs of policy options might also be helpful for overcoming psychological reform resistance.