Three Cheers—Psychological, Theoretical, Empirical—for Loss Aversion

Journal of Marketing Research (JMR)

Three Cheers—Psychological, Theoretical, Empirical—for Loss Aversion

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Published 5/1/2005

Author: Colin Camerer

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Executive Summary
This note emphasizes the special role of prospect theory in drawing psychophysical considerations into theories of decision making under risk. For example, a consideration is the dependence of outcome value on a reference point and the increased sensitivity of loss relative to gain (i.e., loss aversion). Loss aversion can explain the St. Petersburg paradox without requiring concave utility, it has the the correct psychological foundation, it is theoretically useful, and it is a parsimonious principle that can explain many puzzles. A few open questions are whether loss aversion is a stable feature of preference, whether it is an expression of fear, and what are its properties.

Biography
Colin Camerer is Rea and Lela Axline Professor of Business Economics at the California Institute of Technology, Pasadena, where he teaches both cognitive psychology and economics. Professor Camerer earned a bachelor’s degree in quantitative studies from Johns Hopkins in 1977, an MBA in finance (1979), and a doctoral degree in decision theory (1981) from the University of Chicago Graduate School of Business. Before coming to Caltech in 1994, he held positions at the Kellogg, Wharton, and University of Chicago business schools. His work uses evidence from psychology to inform economic models of risky choice, game theory, and market dynamics, with applications to bargaining, gambling, labor economics, and stock market bubbles. His latest work uses evidence from neuroscience to inform economics (“neuroeconomics”).

J Marketing Research, Volume 42, Number 2, May 2005
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Journal of Marketing Research (JMR)