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The Impact of Culture on Loss Aversion
This study investigates the differing role of enforcement on the formation of venture capital (VC) syndication networks. We conjecture that public enforcement, with strong investigative powers against any syndicate member, discourages the formation of denser syndication networks due to misconduct risk by a member. By contrast, private enforcement, with strong disclosure and liability standards, enables denser syndication networks, through clear liability rules, standardized securities contracts, and cost sharing amongst syndicate members. Our VC data from 31 countries show a negative impact of public enforcement on VC networks, and partially support the positive impact of private enforcement depending on cultural conditions.
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We present results from the first large-scale international survey on time preference, conducted in 53 countries. All countries exhibit hyperbolic discounting patterns, i.e., the immediate future is discounted more than far future. We also observe higher heterogeneity for shorter time horizons, consistent with the pattern reviewed by Frederick, Loewenstein, and O’Donoghue (2002). Cultural factors as captured by the Hofstede cultural dimensions (Hofstede, 1991) contribute significantly to the variation of time discounting, even after controlling for economic factors, such as GDP, inflation rate and growth rate. In particular, higher levels of Uncertainty Avoidance are associated with stronger hyperbolic discounting, whereas higher degrees of Individualism and Long Term Orientation predict stronger tendency to wait for larger payoffs. We also find the waiting tendency is correlated with innovation, environmental protection, crediting rating, and body mass index at country level after controlling for county wealth. These results help us to enhance the understanding of differences across financial markets and economic behavior worldwide.
We present results from a large-scale international survey on risk preferences conducted in 53 countries. In all countries, we find, on average, an attitude of risk aversion in gains and of risk seeking in losses. The degree of risk aversion shows significant cross-country differences. Moreover, risk attitudes in our sample depend not only on economic conditions but also on cultural factors, as measured by the Hofstede dimensions individualism and uncertainty avoidance. The data may also serve as an interesting starting point for further research on cultural differences in behavioral economics.
Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2013.1869 .
This paper was accepted by Peter Wakker, decision analysis.
In this chapter we first review theories of emo-tion that are most relevant to a consideration of the roles of biology and culture. We then re-view the existing cross-cultural and cross-ethnic research relevant to these theories, with particular emphasis on studies that have actu-ally measured biological responses that occur during emotional reactions. We conclude by presenting a revised version of our earlier biocultural model of emotion (Levenson, 2003) that allows for both biological and cultural in-fluences, and that is informed by existing em-pirical data. EMOTION THEORY Emotions are short-lived psychological– physiological phenomena that represent effi-cient modes of adaptation to changing environ-mental demands (Levenson, 1994). In humans, the emotion system is influenced by both biol-ogy (e.g., the availability of a facial muscula-ture that can produce an array of appearance changes) and culture (e.g., the rules, traditions, and beliefs concerning how and when to use these muscles to reveal or conceal how we feel). Emotion theorists have long struggled with how to account for both kinds of influence. In general, theories growing out of the evolution-ary tradition embrace biological influences, viewing specific features of the emotion system as chosen by natural selection for their value in survival and reproduction. In contrast, theories growing out of the anthropological tradition embrace cultural influences, viewing emotion as created in ways that meet cultural traditions, beliefs, and values. Although most modern the-ories eschew extreme evolutionary and cultural construction positions, they differ greatly in terms of how they locate emotion between these poles.
This article reports differences across 23 countries on 2 processes of emotion regulation––reappraisal and suppression. Cultural dimensions were correlated with country means on both and the relationship between them. Cultures that emphasized the maintenance of social order––that is, those that were long-term oriented and valued embeddedness and hierarchy––tended to have higher scores on suppres-sion, and reappraisal and suppression tended to be positively correlated. In contrast, cultures that minimized the maintenance of social order and valued individual Affective Autonomy and Egalitarianism tended to have lower scores on Suppression, and Reappraisal and Suppression tended to be negatively correlated. Moreover, country-level emotion regulation was significantly correlated with country-level indices of both positive and negative adjustment. The 37 coauthors of this article, in alphabetical order by last name, are as follows:
Beliefs about emotions can influence how people regulate their emotions. The present research examined whether Eastern dialectical beliefs about negative emotions lead to cultural differences in how people regulate their emotions after experiencing a negative event. We hypothesized that, because of dialectical beliefs about negative emotions prevalent in Eastern culture, Easterners are less motivated than Westerners to engage in hedonic emotion regulation-up-regulation of positive emotions and down-regulation of negative emotions. By assessing online reactions to a recent negative event, Study 1 found that European Americans are more motivated to engage in hedonic emotion regulation. Furthermore, consistent with the reported motivation to regulate emotion hedonically, European Americans show a steeper decline in negative emotions 1 day later than do Asians. By examining retrospective memory of reactions to a past negative event, Study 2 further showed that cultural differences in hedonic emotion regulation are mediated by cultural differences in dialectical beliefs about motivational and cognitive utility of negative emotions, but not by personal deservingness or self-efficacy beliefs. These findings demonstrate the role of cultural beliefs in shaping emotion regulation and emotional experiences. (PsycINFO Database Record (c) 2014 APA, all rights reserved).
Abstract In this research we compare the risk-taking attitude and behavior between a sample of 470 Chinese workers and a sample of 2,671 Americans from the Survey of Consumer Finances. Our findings show that Chinese in our sample are more risk tolerant than Americans in their financial decisions, both in attitude and behavior, a result in line with Weber and Hsee's (1998) cushion theory and their empirical findings. Alternative explanations such as a lack of knowledge,about the relationship between risk and return among,the current generation Chinese are also explored. Theoretical and practical implications of this research are discussed.
Previously (see Novemsky and Kahneman 2005), the authors proposed that intentions to exchange versus to consume a good moderate loss aversion for that good. In this rejoinder, the authors follow up on this idea, discussing several mechanisms that Ariely, Huber, and Wertenbroch (2005) propose by which intentions can moderate loss aversion. The authors consider both emotional attachment to the good and cognitive focus during evaluation as potential mediators of the effects of intentions on loss aversion.
The relative importance of emotions versus normative beliefs for life satisfaction judgments was compared among individualist and collectivist nations in 2 large sets of international data (in total, 61 nations,
N = 62,446). Among nations, emotions and life satisfaction correlated significantly more strongly in more individualistic nations (
r = .52 in Study 1;
r = .48 in Study 2). At the individual level, emotions were far superior predictors of life satisfaction to norms (social approval of life satisfaction) in individualist cultures, whereas norms and emotions were equally strong predictors of life satisfaction in collectivist cultures. The present findings have implications for future studies on cultural notions of well-being, the functional value of emotional experiences, and individual differences in life satisfaction profiles. (PsycINFO Database Record (c) 2012 APA, all rights reserved)
People in different cultures have strikingly different construals of the self, of others, and of the interdependence of the 2. These construals can influence, and in many cases determine, the very nature of individual experience, including cognition, emotion, and motivation. Many Asian cultures have distinct conceptions of individuality that insist on the fundamental relatedness of individuals to each other. The emphasis is on attending to others, fitting in, and harmonious interdependence with them. American culture neither assumes nor values such an overt connectedness among individuals. In contrast, individuals seek to maintain their independence from others by attending to the self and by discovering and expressing their unique inner attributes. As proposed herein, these construals are even more powerful than previously imagined. Theories of the self from both psychology and anthropology are integrated to define in detail the difference between a construal of the self as independent and a construal of the self as interdependent. Each of these divergent construals should have a set of specific consequences for cognition, emotion, and motivation; these consequences are proposed and relevant empirical literature is reviewed. (PsycINFO Database Record (c) 2012 APA, all rights reserved)
In this article, the authors propose some psychological principles to describe the boundaries of loss aversion. A key idea is that exchange goods that are given up "as intended" do not exhibit loss aversion. For example, the authors propose that money given up in purchases is not generally subject to loss aversion. The results of several experiments provide preliminary support for the hypotheses. The authors find that, consistent with prospect theory, loss aversion provides a complete account of risk aversion for risks with equal probability to win or lose. The authors propose boundaries for this result and suggest further tests of the model.
We tested the hypothesisthàgood feelings'' Ð the central element of sub-jective well-beingÐ are associated with interdependence and interpersonal engagement of the self in Japan, but with independence and interpersonal disengagement of the self in the United States. Japanese and American college students (total N 5 913) reported how frequently they experienced various emotional states in daily life. In support of the hypothesis, the reported frequency of general positive emotions (e.g. calm, elated) was most closely associated with the reported frequency of interpersonally engaged positive emotions (e.g. friendly feelings) in Japan, but with the reported frequency of interpersonally disengaged positive emotions (e.g. pride) in the United States. Further, for Americans the reported frequency of experience was considerably higher for positive emotions than for negative emotions, but for Japanese it was higher for engaged emotions than for disengaged emotions. Implications for cultural constructions of emotion in general and subjective well-being in particular are discussed.
We study how decision makers choose when faced with multiple plays of a gamble or investment. When evaluating multiple plays of a simple mixed gamble, a chance to win x or lose y, subjects show a sensitivity to the amount to lose on a single trial, holding the distribution of returns for the portfolio constant; that is, they display "myopic loss aversion." Many subjects who decline multiple plays of such a gamble will accept it when shown the resulting distribution. This analysis is applied to the problem of retirement investing. We show that workers invest more of their retirement savings in stocks if they are shown long-term (rather than one-year) rates of return.
Hofstede’s dimensions of national cultures termed Masculinity–Femininity (MAS) and Uncertainty Avoidance (UAI) (Hofstede, 2001) are proposed to be of relevance for understanding national-level differences in self-assessed fears. The potential predictive role of national MAS was based on the classical work of Fodor (Fodor, 1974). Following Fodor, it was predicted that masculine (or tough) societies in which clearer differentiations are made between gender roles (high MAS) would report higher national levels of fears than feminine (or soft/modest) societies in which such differentiations are made to a clearly lesser extent (low MAS). In addition, it was anticipated that nervous-stressful-emotionally-expressive nations (high UAI) would report higher national levels of fears than calm-happy and low-emotional countries (low UAI), and that countries high on both MAS and UAI would report the highest national levels of fears. A data set comprising 11 countries (N > 5000) served as the basis for analyses. As anticipated, (a) high MAS predicted higher national levels of Agoraphobic fears and of Bodily Injury–Illness–Death fears; (b) higher scores on both UAI and MAS predicted higher national scores on Bodily Injury–Illness–Death fears, fears of Sexual and Aggressive Scenes, and Harmless Animals fears; (c) higher UAI predicted higher national levels of Harmless Animals, Bodily Injury–Illness–Death, and Agoraphobic fears.
Emotion regulation strategies can alter behavioral and physiological responses to emotional stimuli and the neural correlates
of those responses in regions such as the amygdala or striatum. The current study investigates the brain systems engaged when
using an emotion regulation technique during financial decisions. In decision making, regulating emotion with reappraisal-focused
strategies that encourage taking a different perspective has been shown to reduce loss aversion as observed both in choices
and in the relative arousal responses to actual loss and gain outcomes. In the current study, we find using fMRI that behavioral
loss aversion correlates with amygdala activity in response to losses relative to gains. Success in regulating loss aversion
also correlates with the reduction in amygdala responses to losses but not to gains. Furthermore, across both decisions and
outcomes, we find the reappraisal strategy increases baseline activity in dorsolateral and ventromedial prefrontal cortex
and the striatum. The similarity of the neural circuitry observed to that seen in emotion regulation, despite divergent tasks,
serves as further evidence for a role of emotion in decision making, and for the power of reappraisal to change assessments
of value and thereby choices.
A growing body of qualitative evidence shows that loss aversion, a phenomenon formalized in prospect theory, can explain a variety of field and experimental data. Quantifications of loss aversion are, however, hindered by the absence of a general preference-based method to elicit the utility for gains and losses simultaneously. This paper proposes such a method and uses it to measure loss aversion in an experimental study without making any parametric assumptions. Thus, it is the first to obtain a parameter-free elicitation of prospect theory's utility function on the whole domain. Our method also provides an efficient way to elicit utility midpoints, which are important in axiomatizations of utility. Several definitions of loss aversion have been put forward in the literature. According to most definitions we find strong evidence of loss aversion, at both the aggregate and the individual level. The degree of loss aversion varies with the definition used, which underlines the need for a commonly accepted definition of loss aversion.
Four studies examined the hypothesis that, although people may generally want to savor, rather than to dampen, their positive emotions (i.e., hedonic emotion regulation), such a hedonic emotion regulation tendency should be less pronounced for Easterners than for Westerners. Using retrospective memory procedures, Study 1 found that Easterners recalled engaging in hedonic emotion regulation less than Westerners did, even after controlling for their initial emotional reactions. Studies 2-3 showed that cultural differences in emotion regulation were mediated by dialectical beliefs about positive emotions. Study 4 replicated the findings by examining online reports of emotion regulation strategies on the day students received a good grade. Furthermore, there were cultural differences in actual emotion change over time, which was partly explained by dialectical beliefs about positive emotions. These findings highlight the active role cultural scripts play in shaping emotion regulation and emotional experiences.
Appraisal theories of emotion propose that the emotions people experience correspond to their appraisals of their situation. In other words, individual differences in emotional experiences reflect differing interpretations of the situation. We hypothesized that in similar situations, people in individualist and collectivist cultures experience different emotions because of culturally divergent causal attributions for success and failure (i.e., agency appraisals). In a test of this hypothesis, American and Japanese participants recalled a personal experience (Study 1) or imagined themselves to be in a situation (Study 2) in which they succeeded or failed, and then reported their agency appraisals and emotions. Supporting our hypothesis, cultural differences in emotions corresponded to differences in attributions. For example, in success situations, Americans reported stronger self-agency emotions (e.g., proud) than did Japanese, whereas Japanese reported a stronger situation-agency emotion (lucky). Also, cultural differences in attribution and emotion were largely explained by differences in self-enhancing motivation. When Japanese and Americans were induced to make the same attribution (Study 2), cultural differences in emotions became either nonsignificant or were markedly reduced.
The endowment effect--the tendency for owners (potential sellers) to value objects more than potential buyers do--is among the most widely studied judgment and decision-making phenomena. However, the current research is the first to explore whether the effect varies across cultures. Given previously demonstrated cultural differences in self-construals and self-enhancement, we predicted a smaller endowment effect for East Asians compared with Westerners. Two studies involving buyers and sellers of a coffee mug (Study 1a) and a box of chocolates (Study 1b) supported this prediction. Study 2 conceptually replicated this cultural difference by experimentally manipulating independent and interdependent self-construals. Finally, Study 3 provided evidence for an underlying self-enhancement mechanism: Cultural differences emerged when self-object associations were made salient, but disappeared when self-object associations were minimized. Thus, the endowment effect may be influenced by the degree to which independence and self-enhancement (vs. interdependence and self-criticism) are culturally valued or normative.
We conducted experiments in Vietnamese villages to determine the predictors of risk and time preferences. In villages with higher mean income, people are less loss-averse and more patient. Household income is correlated with patience but not with risk. We expand measurements of risk and time preferences beyond expected utility and exponential discounting, replacing those models with prospect theory and a three-parameter hyperbolic discounting model. Comparable risk parameter estimates have been found for Chinese farmers, using our method. (C83, D12, O12, P38)
Using data from 598 studies representing over 200,000 individuals, we meta-analyzed the relationship between G. Hofstede's (1980a) original 4 cultural value dimensions and a variety of organizationally relevant outcomes. First, values predict outcomes with similar strength (with an overall absolute weighted effect size of rho = 0.18) at the individual level of analysis. Second, the predictive power of the cultural values was significantly lower than that of personality traits and demographics for certain outcomes (e.g., job performance, absenteeism, turnover) but was significantly higher for others (e.g., organizational commitment, identification, citizenship behavior, team-related attitudes, feedback seeking). Third, cultural values were most strongly related to emotions, followed by attitudes, then behaviors, and finally job performance. Fourth, cultural values were more strongly related to outcomes for managers (rather than students) and for older, male, and more educated respondents. Fifth, findings were stronger for primary, rather than secondary, data. Finally, we provide support for M. Gelfand, L. H. Nishii, and J. L. Raver's (2006) conceptualization of societal tightness-looseness, finding significantly stronger effects in culturally tighter, rather than looser, countries.
Sumario: The present study assessed cross-cultural differences in the perception of financial risks. Students at large universities in Hong-Kong, Taiwan, the Netherlands, and the U.S., as well as a group of Taiwanese security analyst rated the riskiness of a set of monetary lotteries. Risk Judgments differed with nationality, but not with occupation and were modeled by the Conjoint Expected Risk (CER) model. Consistent with cultural differences in country uncertainty avoidance, CER model parameters of respondents from the two Western countries differed from those of respondents from the two countries with Chinese cultural roots: the risk judgments of respondents from Hong Kong and Taiwan were more sensitive to the magnitude of potential losses and less mitigated by the probability of positive outcomes
Research on emotion regulation has focused upon observers' ability to regulate their emotional reaction to stimuli such as affective pictures, but many other aspects of our affective experience are also potentially amenable to intentional cognitive regulation. In the domain of decision-making, recent work has demonstrated a role for emotions in choice, although such work has generally remained agnostic about the specific role of emotion. Combining psychologically-derived cognitive strategies, physiological measurements of arousal, and an economic model of behavior, this study examined changes in choices (specifically, loss aversion) and physiological correlates of behavior as the result of an intentional cognitive regulation strategy. Participants were on average more aroused per dollar to losses relative to gains, as measured with skin conductance response, and the difference in arousal to losses versus gains correlated with behavioral loss aversion across subjects. These results suggest a specific role for arousal responses in loss aversion. Most importantly, the intentional cognitive regulation strategy, which emphasized "perspective-taking," uniquely reduced both behavioral loss aversion and arousal to losses relative to gains, largely by influencing arousal to losses. Our results confirm previous research demonstrating loss aversion while providing new evidence characterizing individual differences and arousal correlates and illustrating the effectiveness of intentional regulation strategies in reducing loss aversion both behaviorally and physiologically.
Behavioral economics has demonstrated systematic decision-making biases in both lab and field data. Do these biases extend across contexts, cultures, or even species? We investigate this question by introducing fiat currency and trade to a colony of capuchin monkeys and recovering their preferences over a range of goods and gambles. We show that capuchins react rationally to both price and wealth shocks but display several hallmark biases when faced with gambles, including reference dependence and loss aversion. Given our capuchins' inexperience with money and trade, these results suggest that loss aversion extends beyond humans and may be innate rather than learned.
The equity premium puzzle refers to the empirical fact that stocks have outperformed bonds over the last century by a surprisingly
large margin. We offer a new explanation based on two behavioral concepts. First, investors are assumed to be “loss averse,”
meaning that they are distinctly more sensitive to losses than to gains. Second, even long-term investors are assumed to evaluate
their portfolios frequently. We dub this combination “myopic loss aversion.” Using simulations, we find that the size of the
equity premium is consistent with the previously estimated parameters of prospect theory if investors evaluate their portfolios
annually.
The purpose of this article is to determine whether the positive association between social support and well-being is attributable more to an overall beneficial effect of support (main- or direct-effect model) or to a process of support protecting persons from potentially adverse effects of stressful events (buffering model). The review of studies is organized according to (a) whether a measure assesses support structure or function, and (b) the degree of specificity (vs. globality) of the scale. By structure we mean simply the existence of relationships, and by function we mean the extent to which one’s interpersonal relationships provide particular resources. Special attention is paid to methodological characteristics that are requisite for a fair comparison of the models. The review concludes that there is evidence consistent with both models. Evidence for a buffering model is found when the social support measure assesses the perceived availability of interpersonal resources that are responsive to the needs elicited by stressful events. Evidence for a main effect model is found when the support measure assesses a person’s degree of integration in a large social network. Both conceptualizations of social support are correct in some respects, but each represents a different process through which social support may affect well-being. Implications of these conclusions for theories of social support processes and for the design of preventive interventions are discussed.
This research explores whether there are systematic cross-national differences in choice-inferred risk preferences between Americans and Chinese. Study 1 found (a) that the Chinese were significantly more risk seeking than the Americans, yet (b) that both nationals predicted exactly the opposite - that the Americans would be more risk seeking. Study 2 compared Americans and Chinese risk preferences in investment, medical and academic decisions, and found that Chinese were more risk seeking than Americans only in the investment domain and not in the other domains. These results are explained in terms of a cushion hypothesis, which suggests people in a collectivist society, such as China, are more likely to receive financial help if they are in need (i.e. they could be cushioned if they fell), and consequently, they are less risk averse than those in an individualistic society such as the USA.
In defining limits to loss aversion, Novemsky and Kahneman (2005) offer important new data and a needed summary of appropriate ways to think about loss aversion. In this comment to Novemsky and Kahne-man's article, the authors consider the new empirical results that involve probabilistic buying and selling, suggesting caution in generalizing the results to nonprobabilistic commerce. The authors expand Novemsky and Kahneman's summary by exploring two critical constructs that help define the boundaries of loss aversion: emotional attachment and cogni-tive perspective. Emotional attachment alters loss aversion by moderat-ing the degree to which parting with an item involves a loss, whereas shifts in cognitive perspective explain why items typically viewed as a loss are given more or less weight. The goal is to use these constructs to characterize more specifically contexts in which losses loom larger than gains and to suggest specific ways that research into loss aversion could evolve.
Prospect Theory: For Risk and Ambiguity provides the first comprehensive and accessible textbook treatment of the way decisions are made both when we have the statistical probabilities associated with uncertain future events (risk) and when we lack them (ambiguity). The book presents models, primarily prospect theory, that are both tractable and psychologically realistic. A method of presentation is chosen that makes the empirical meaning of each theoretical model completely transparent. Prospect theory has many applications in a wide variety of disciplines. The material in the book has been carefully organized to allow readers to select pathways through the book relevant to their own interests. With numerous exercises and worked examples, the book is ideally suited to the needs of students taking courses in decision theory in economics, mathematics, finance, psychology, management science, health, computer science, Bayesian statistics, and engineering.
Attitudes towards risk and uncertainty have been indicated to be highly context-dependent, and to be sensitive to the measurement technique employed. We present data collected in controlled experiments with 2,939 subjects in 30 countries measuring risk and uncertainty attitudes through incentivized measures as well as survey questions. Our data show clearly that measures correlate not only within decision contexts or measurement methods, but also across contexts and methods. This points to the existence of one underlying “risk preference”, which influences attitudes independently of the measurement method or choice domain. We furthermore find that answers to a general and a financial survey question correlate with incentivized lottery choices in most countries. Incentivized and survey measures also correlate significantly between countries. This opens the possibility to conduct cultural comparisons on risk attitudes using survey instruments.
Given the mounting empirical evidence to support both the cultural and biological shaping of emotional processes, there is a clear need to integrate these determinants of emotional processes. Much in the same vein as these efforts, in our research on gene-culture interactions, we have examined how cultural and biological factors jointly influence emotion regulation. The present paper specifically aims to present research considering both cultural and genetic factors as two interacting influences that shape emotion regulation. A series of studies conducted to test the gene-culture interaction involving OXTR rs53576 consistently show that individuals with the variant that is associated with socio-emotional sensitivity tend to utilize culturally normative forms of emotion regulation more than those without it. These findings underscore the importance of considering the interplay between socio-cultural and genetic factors that shape social behaviors.
"This is the classic work upon which modern-day game theory is based. What began more than sixty years ago as a modest proposal that a mathematician and an economist write a short paper together blossomed, in 1944, when Princeton University Press published Theory of Games and Economic Behavior. In it, John von Neumann and Oskar Morgenstern conceived a groundbreaking mathematical theory of economic and social organization, based on a theory of games of strategy. Not only would this revolutionize economics, but the entirely new field of scientific inquiry it yielded--game theory--has since been widely used to analyze a host of real-world phenomena from arms races to optimal policy choices of presidential candidates, from vaccination policy to major league baseball salary negotiations. And it is today established throughout both the social sciences and a wide range of other sciences. This sixtieth anniversary edition includes not only the original text but also an introduction by Harold Kuhn, an afterword by Ariel Rubinstein, and reviews and articles on the book that appeared at the time of its original publication in the New York Times, tthe American Economic Review, and a variety of other publications. Together, these writings provide readers a matchless opportunity to more fully appreciate a work whose influence will yet resound for generations to come.
The Second Edition of this classic work, first published in 1981 and an international bestseller, explores the differences in thinking and social action that exist among members of more than 50 modern nations. Geert Hofstede argues that people carry "mental programs" which are developed in the family in early childhood and reinforced in schools and organizations, and that these programs contain components of national culture. They are expressed most clearly in the different values that predominate among people from different countries. Geert Hofstede has completely rewritten, revised and updated Cultures Consequences for the twenty-first century, he has broadened the book's cross-disciplinary appeal, expanded the coverage of countries examined from 40 to more than 50, reformulated his arguments and a large amount of new literature has been included. The book is structured around five major dimensions: power distance; uncertainty avoidance; individualism versus collectivism; masculinity versus femininity; and long term versus short-term orientation. --Publisher.
Within the expected-utility framework, the only explanation for risk aversion is that the utility function for wealth is concave: A person has lower marginal utility for additional wealth when she is wealthy than when she is poor. This paper provides a theorem showing that expected-utility theory is an utterly implausible explanation for appreciable risk aversion over modest stakes: Within expected-utility theory, for any concave utility function, even very little risk aversion over modest stakes implies an absurd degree of risk aversion over large stakes. Illustrative calibrations are provided. Keywords: Diminishing Marginal Utility, Expected Utility, Risk Aversion JEL Classifications: B49, D11, D81 Acknowledgments: Many people, including David Bowman, Colin Camerer, Eddie Dekel, Larry Epstein, Erik Eyster, Mitch Polinsky, Drazen Prelec, Richard Thaler, and Roberto Weber, as well as Andy Postlewaite and two anonymous referees, have provided useful feedback on this paper. I th...
We review experimental evidence collected from risky choice experiments using poor subjects in Ethiopia, India and Uganda. Using these data we estimate that just over 50% of our sample behaves in accordance with expected utility theory and that the rest subjectively weight probability according to prospect theory. Our results show that inferences about risk aversion are robust to whichever model we adopt when we estimate each model separately. However, when we allow both models to explain portions of the data simultaneously, we infer risk aversion for subjects behaving according to expected utility theory and risk-seeking behaviour for subjects behaving according to prospect theory.
We show that security-potential-aspiration theory (SP/A) and cumulative prospect theory (CPT), although based on very different psychological principles are mathematically very similar when studied in the appropriate framework. This helps to interpret results on portfolio optimization under behavioral preferences.
"Culture and personality" was a focus of anthropology and psychology in the first half of the 20th century. It was concerned with traditional and preliterate societies and drew many of its constructs from psychoanalysis. In this article, we note that taxonomies of personality traits and cultural values developed independently since 1980 have created new possibilities for exploring the topic. The Five-Factor Model of personality is a universally valid taxonomy of traits. The IBM study (conducted by Hofstede) dimensions of culture represent a well-validated operationalization of differences between cultures as manifested in dominant value systems. In reanalyses of recently reported data, mean personality scores from 33 countries were significantly and substantially correlated with culture dimension scores. We discuss environmental and temperamental explanations for these associations and suggest directions for future research, including replications, experimental simulations, acculturation studies, and research on the interaction of traits and culture in shaping human lives.
The economic theory of the consumer is a combination of positive and normative theories. Since it is based on a rational maximizing model it describes how consumers should choose, but it is alleged to also describe how they do choose. This paper argues that in certain well-defined situations many consumers act in a manner that is inconsistent with economic theory. In these situations economic theory will make systematic errors in predicting behavior. Kanneman and Tversey's prospect theory is proposed as the basis for an alternative descriptive theory. Topics discussed are: undeweighting of opportunity costs, failure to ignore sunk costs, scarch behavior choosing not to choose and regret, and precommitment and self-control.
This note emphasizes the special role of prospect theory in drawing
psychophysical considerations into theories of decision making with
respect to risk. An example of such 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 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.
We examined reference point adaptation following gains or losses in security trading using participants from China, Korea, and the US. In both questionnaire studies and trading experiments with real money incentives, reference point adaptation was larger for Asians than for Americans. Subjects in all countries adapted their reference points more after a gain than after an equal-sized loss. When we introduced a forced sale intervention that is designed to close the mental account for a prior outcome, Americans showed greater adaptation toward the new price than their Asian counterparts. We offer possible explanations both for the cross-cultural similarities and the cross-cultural differences.
Four experiments tested the prediction that power reduces loss aversion by increasing the anticipated value of gains and shrinking the negative anticipated value of losses. Experiment 1 provided initial support for the prediction that those in power are less loss averse by replicating a classic paradigm of loss aversion in riskless choice and demonstrating moderation by power. Experiments 2 and 3 expanded on this finding by breaking apart the components of loss aversion to determine how power may reduce it: via gains, losses, or both. Across two scenarios and two different measures of anticipated value, power reduced the anticipated threat associated with a loss. However, the prediction that power increases the anticipated value of gains was not supported. Finally, Experiment 4 replicated the results of Experiments 2 and 3 in the context of a choice with real consequences for the participants. Implications of these findings are discussed.
Hofstede's dimension of national culture termed Masculinity-Femininity [Hofstede (1991). Cultures and organizations: software of the mind. London: McGraw-Hill] is proposed to be of relevance for understanding national-level differences in self-assessed agoraphobic fears. This prediction is based on the classical work of Fodor [Fodor (1974). In: V. Franks & V. Burtle (Eds.), Women in therapy: new psychotherapies for a changing society. New York: Brunner/Mazel]. A unique data set comprising 11 countries (total N = 5491 students) provided the opportunity of scrutinizing this issue. It was hypothesized and found that national Masculinity (the degree to which cultures delineate sex roles, with masculine or tough societies making clearer differentiations between the sexes than feminine or modest societies do) would correlate positively with national agoraphobic fear levels (as assessed with the Fear Survey Schedule-III). Following the correction for sex and age differences across national samples, a significant and large effect-sized national-level (ecological) r = +0.67 (P = 0.01) was found. A highly feminine society such as Sweden had the lowest, whereas the champion among the masculine societies, Japan, had the highest national Agoraphobic fear score. (C) 2003 Elsevier Science Ltd. All rights reserved.
Much experimental evidence indicates that choice depends on the status quo or reference level: changes of reference point often lead to reversals of preference. The authors present a reference-dependent theory of consumer choice, which explains such effects by a deformation of indifference curves about the reference point. The central assumption of the theory is that losses and disadvantages have greater impact on preferences than gains and advantages. Implications of loss aversion for economic behavior are considered. Copyright 1991, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
Two experiments were designed to explore the existence of systematic differences in risk perceptions and risk attitudes between Chinese and US participants. The first experiment involved ranking monetary lotteries using measures of perceived riskiness and willingness to pay (WTP). Several simple heuristics were evaluated to predict perceived riskiness and WTP. Using WTP responses, Cumulative
Prospect Theory functions were determined for participants from both countries. The second experiment involved ranking multi-attribute real-world risks and associated risk-mitigation programs using measures of concern and preference,respectively. Compared to their US counterparts, Chinese participants are found to be less risk averse, more concerned about risks with higher catastrophic potential, and more in favor of risk-mitigation programs with greater scope of benefit. The results also reveal higher within-group agreement by Chinese participants for all tasks. For both national groups, the within-group agreement was highest when ranking risk-mitigation programs, but lowest when ranking lotteries with negative expected value. The implications of cross-cultural versus cross-task variation are discussed.
In the present study, burnout scores of three samples, as measured with the Maslach Burnout Inventory, were compared: (1) the normative American sample from the test-manual (N = 10,067), (2) the normative Dutch sample (N = 3,892), and (3) a Dutch outpatient sample (N = 142). Generally, the highest burnout scores were found for the outpatient sample, followed by the American and Dutch normative samples, respectively. Slightly different patterns were noted for each of the three components. Probably sampling bias, i.e., the healthy worker effect, or cultural value patterns, i.e., femininity versus masculinity, might be responsible for the results. It is concluded that extreme caution is required when cut-off points are used to classify individuals by burnout scores; only nation-specific and clinically derived cut-off points should be employed.