Kahneman and Tversky (1979) propose that individuals will tend to demand a substantial premium over an expected value of zero to accept a bet with even odds of winning and losing the bet. In the words of Kahneman and Tversky (1979), “most people find symmetrical bets of the form (x, 0.50; !x, 0.50) distinctly unattractive.” In a typical demonstration, which we refer to as the risky bet premium paradigm, if individuals are offered a bet with a 50% chance of losing $5 and a 50% chance of winning X, on average, they demand that X be $10 or more in order to accept the bet. This finding is assumed to reflect the greater perceived psychological impact of a loss compared with a gain (Tversky & Kahneman, 1992).
Gal (2006) points out that the risky bet premium can be conceived as a special case of the status quo bias paradigm where not accepting the bet is the status quo (or inaction) option and accepting the bet is the change (or action) option. As a result, similar explanations to those that can explain the status quo bias and endowment effect can explain the risky bet premium. Therefore, it is unclear whether the risky bet premium reflects a general tendency of losses to loom larger than gains or reflects processes associated with a propensity to favor inaction over action.
In order to decouple losses and gains from inaction and action in the context of risky choice, Gal (2006) presented participants with a risky bet, where no difference in action or inaction existed with respect to accepting the bet and not accepting the bet. Gal found no evidence that losses loomed larger than gains. Specifically, in a hypothetical decision to allocate funds ($100) between a safe alternative that returned 3% for sure and a mixed even bet with an expected return of zero, nearly 80% of individuals allocated at least some funds to the even bet, that is, to a risky option with lower expected value than the safe option, and approximately 20% of individuals allocated all the funds to the even bet, an amount which matched the percentage of individuals allocating all their funds to the safe option.
Rather than evidence for loss aversion, if anything, the behavior documented by Gal (2006) appears, on net, to reflect gain seeking. Other researchers have similarly found that when given multiple investment options, individuals tend to choose risky investment options over safer investment options with higher expected value (Ben-Zion, Erev, Haruvy, & Shavit, 2010). Such findings appear difficult to reconcile with a general principle of loss aversion (see also Erev, Ert, & Roth, 2010; Sonsino, Erev, & Gilat, 2002 for results with similar implications) and provide evidence against both the strong and weak versions of loss aversion considered here.
Other researchers have found that when accepting a risky bet is not framed as the sole action option, but as one option in a choice between two action options, no evidence for loss aversion emerges (Erev, Ert, & Yechiam, 2008; Ert & Erev, 2013; Ert & Yechiam, 2010; Hochman & Yechiam, 2011; Koritzky & Yechiam, 2010; Yechiam & Ert, 2007). For example, Erev et al. (2008) offered participants a choice between either (a) receiving 0 points for sure or (b) receiving a bet that offered a 50% chance to win 1000 points and a 50% chance to lose 1000 points (points were to be converted to money at a known ratio). Erev et al. found that 48% of participants chose the safe option (i.e., receiving 0 point for sure) and 52% of participants chose the risky option. Consistent with this finding, a review of over 30 papers finds little evidence that losses loom larger than gains in the context of risky choice when a bet with even odds of gaining and losing is not framed as the action option (Yechiam & Hochman, 2013). We recently found additional support for this conclusion in two separate runs of an experiment conducted with participants from MTurk. In particular, we asked participants to imagine they faced a choice between either (a) receiving $0 with 100% chance or (b) receiving $15 with 50% chance or losing $15 with 50% chance. In both runs, participants exhibited a trend toward the choice of the risky option (Figure 2). Thus, we did not find evidence for participants to avoid loss any more than they pursued gain in risky choice.
The stakes of the outcomes in risky choice experiments that do not show evidence for loss aversion tend to be low to moderate (from less than $1 to as high as $100). Conversely, some experiments that involve higher stakes (e.g., several hundred dollars) have shown a tendency among individuals to choose the safer alternative. However, loss aversion is assumed to be independent of the level of the stakes involved (Kahneman & Tversky, 1979). In fact, that the effects attributed to loss aversion have been found with small stakes is cited as particularly strong evidence for loss aversion (Rabin, 2003; Rabin & Thaler, 2001). The reason scholars have focused on small stakes is because avoidance of large magnitude losses can be explained by ordinary risk aversion for changes in wealth/circumstances, which is entirely consistent with rational choice theory, whereas the same is not true of avoidance of low stakes losses that do not materially impact wealth/circumstances. For example, it is rational to perceive a greater impact from losing $1000 that is needed to pay the rent than from gaining $1000 when basic needs are already covered. Conversely, if neither losing nor gaining $5 materially changes one’s circumstances, it can be viewed as irrational to view its loss as more impactful than its gain. Thus, the finding that people often exhibit risk neutrality in choices among low-stakes mixed gambles is evidence against loss aversion.
Risky choice