ECON 142 Lecture Notes - Lecture 17: Loss Aversion, Tiger Woods, Risk Aversion
21 Jun 2020
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Loss aversion - valuing gains differently than losses. Rather than making consistent decisions over wealth states, agents evaluate decisions in isolation with respect to a reference point. Risk aversion: the expected utility of income is less than the utility of expected income. Loss aversion is different-there is a kink in utility of expected income. Eg: exactly 50% of subjects in group were given coffee mug. Those who had mugs were asked the lowest price at which they would sell. Those who don"t receive mugs were asked how much they would pay. Since they were randomly selected, there should essentially be no different between buying and selling prices. In fact median selling price was . 79, median buying price was . 25, a ratio of more than 2 which was repeatedly replicated. Risk premium = area between orange and blue lines = how much you pay to avoid insurance gamble.
