Loss Aversion, Disposition Effect, and Regret Aversion

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Week 8 Essay
1. Explain asymmetric loss aversion. Use some examples in your answer.
Asymmetric loss aversion is an aspect of observation that indicates that people consider losses asymmetrically more hurtful than gains regardless of whether the gains are equivalent to the losses.
An example would be an investment of $30 that incurs a loss of 50% will hurt more than a 50% gain made on an investment of $20.
2. Why do losses hurt more than gains help?
Losses hurt more than gains help because people are increasingly risk averse. Often, people will consider investing in projects or trades that have lower levels of uncertainty regardless of the value or gains they stand to make in a much higher uncertain project or trade.
3. Give me and explain some examples (non-finance) of loss aversion. Give me an explain 3 from the slides.
Non-finance examples
Discounts – discounts make people buy products they do not even need because of the fear of losing money if they choose to buy a product some time later.
Coupons – coupons work the same way as discounts. These spell timeliness, which means that people have to make use of coupons to avoid making losses by being late.
Free samples – these induce the aspect of saving on expenditure in the minds of people. So, many people will flock to such samples in a bid to save on spending money acquiring the real item.
Slide Examples
When prices go down, people increase consumption but not in the same measure they reduce consumption when prices increase. People are more afraid of the loss to be incurred through high prices than they are happy about the lowering of prices.
People choose to endure bad relationships to avoid the pain of dealing with a loss. They maintain their position, incurring all the trouble and problems because they fear dealing with a loss.
During the Vietnam War, the U.S. sent more soldiers even after it had been established that there was no way of winning the war. In doing so, the U.S. was simply avoiding the inevitable of dealing with their loss and thus opted to send more troops.
4. How is refusing to quit related to loss aversion? Explain what happened to the Challenger and at Tenerife and how loss aversion contributed to these disasters.
Refusing to quit is related to loss aversion in that one refuses to accept and deal with a loss. Instead, a person chooses to hope that things might turn out better if they continue along the same path.
The Challenger and the Tenerife cases are clear explanations of the lengths people can go to avoid losses. In both instances, the subjects’ disregard for the risks involved and their desire to ‘not quit’ or ‘taste success’ led to the disasters. In the Challenger case, NASA wanted a spectacle, and having set the stage with news reporters, the only thing left was to launch. In the Tenerife case, the pilot sought pride and the feeling of satisfaction regarding their ability to avoid losses while pulling such a move. In the end, lives were lost.
5. The possibility of a loss works better in policy than do bonuses. For example, when trying to motivate teachers, the possibility of taking away money seems to ...