I've written a couple of posts this week about loss aversion (see here and here). However, loss aversion is not uncontested in the research literature. In fact, the research by Gal and Rucker that I discussed in this 2018 post argued that there was "little evidence to support loss aversion as a general principle". One way of thinking about this is that Gal and Rucker are arguing that not everyone is loss averse. And that is likely true, in the same way that not everyone is risk averse, and not everyone is averse to pineapple on pizza.
A new working paper by Jonathan Chapman (University of Bologna), Erik Snowberg (University of Utah), Stephanie Wang (University of Pittsburgh), and Colin Camerer (Caltech) provides some more evidence for this. In fact, they don't just show that some people are not loss averse. They show that about half of people may in fact be 'loss tolerant'.
Chapman et al.'s main results are based on a sample of 1000 people who completed a survey with the survey panel provider YouGov in 2020. The specific method that they used is quite detailed, but essentially involved 20 different 'gambles', with each gamble using information from the earlier gambles to provide a nuanced understanding of each research participant's attitudes towards risk and towards loss. This Dynamically Optimized Sequential Experimentation (DOSE) method provides estimates for both risk aversion and loss aversion for each research participant.
Importantly, the sample of research participants in the YouGov survey is representative of the underlying US population. Chapman et al. contrast the results from the representative sample with those from a smaller sample of 437 students from the University of Pittsburgh. This comparison is important, because most experimental economics samples are based on student populations (and it has been shown before that student samples are meaningfully different to representative population samples in economics experiments - for example, see here).
For the Chapman et al. paper, the key results are demonstrated in their Figure 3:
Looking at the blue distribution, there are some people in the general population sample who are loss averse (λ>1), but also a lot of people who are loss tolerant (λ<1), as well as some people in the middle. In terms of raw numbers, 57% of the general population sample is loss tolerant. For the student sample, again there is a distribution where some are loss tolerant, but a far higher proportion are loss averse. In the student sample, just 32% are loss tolerant.
So, what is it that makes the student population so much more loss averse than the general population? Chapman et al. show that:
...more educated and more cognitively-able individuals - both characteristics of student samples... - tend to be more loss averse and also less risk averse.
So, university students may be more loss averse because they have higher cognitive ability than the general population and are more educated. That may be good reason to think carefully about whether student samples are necessarily always the best choice to economics experiments.
However, Chapman et al. don't stop there. They then look at why it is that less cognitively-able and less educated people are more loss tolerant, hypothesising that:
...the groups that tend to be more loss tolerant - the less educated, lower income, and less cognitively able - are also those that we might expect to have encountered more losses in life. This raises the intriguing possibility that loss tolerance is shaped by everyday experiences.
And that is what they find:
...loss-tolerant individuals appear more likely to gamble, commit a greater portion of their assets to equities, experience financial shocks, and have lower overall wealth...
So, what should we take away from this research? First, not everyone is loss averse. In fact, a majority of people may be loss tolerant. That doesn't mean that loss aversion is irrelevant for understanding individual decision-making. It just means that we should not assume that everyone is loss averse. Second, we need to take care in extrapolating from student samples in economics experiments to the general population. This is not a new finding (as I noted above), but it is important that we don't lose sight of it. Third, and probably most important, when people routinely experience losses as part of their everyday life, they become more loss tolerant (and less loss averse). That may or may not be a good thing. After all, we talk about loss aversion as a deviation from purely rational decision-making. Being less loss averse may not be a bad thing. On the other hand, if loss tolerance leads to greater losses in the future, that may require a policy response. On this last point, we really need more research.
[HT: Ranil Dissanayake]
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