Loss aversion and the gain/loss comparison hypothesis

Abstract

Loss aversion is a psychological construct, which posits that monetary losses affect behavior to a disproportionate degree when compared to monetary gains of equal value. However, recently researchers have suggested that loss aversion may not be as universal as psychologists once thought (Erev, Ert, & Yechiam, 2008; Ert & Erev, 2013; Gal, 2006; Gal & Rucker, 2018; Yechiam, 2018). McGraw, Larsen, Kahneman, and Schkade (2010) proposed that a psychological comparison of losses and gains on a common scale is behind loss aversion. While they present evidence that they claim supports this hypothesis, methodological flaws in their study make this a tenuous conclusion (notably the use of scales with unequal numbers of points as well as a confounding of the independent and dependent variable). The present study attempted to correct these methodological flaws and test McGraw et al.’s (2010) gain/loss comparison hypothesis, with the independent variable (comparison between gains and losses) placed in the framing of the question. That is, the study asked participants two questions each about a series of 50-50 hypothetical gambles (for values of $1, $5, $50, and $200), one question about the effect that a loss would have on them and the other question about the effect that a gain would have on them. However, participants were randomly assigned to respond to a question about the effect of a loss (gain) of $x knowing that there is also a possibility that they could gain (lose) $x, or to a question with only the relevant gain (loss) mentioned. This study hypothesized that participants who compare gains and losses would show both loss aversion and reversed loss aversion (gains having a greater impact than losses) (Harinck, Van Beest, Van Dijk, & Van Zeeland, 2007), while participants in the non-comparison condition would show indifference across gambles. These results suggest that while magnitude and condition both influenced affective judgments, the predicted interaction between the two variables did not occur. Participants in the comparison condition displayed a trend towards loss aversion, while participants in the non-comparison condition displayed a slight trend towards reversed loss aversion. Future research should consider pilot testing questions to ensure understanding by participants as well as test this framing manipulation in a decision-making context (as opposed to an affective judgment).