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Explore content 10 questions. Big bets. Emerging trends. To succeed in today's world, leaders have to welcome and embrace uncertainty. Flip the boxes to learn more. Manage risk. Emerge more resilient. Strategic risk services Strategic risks have the potential to disrupt business strategy and threaten the very survival of your organization. Crisis management The next crisis that could threaten your organization many already be taking shape, putting your reputation and business at risk.

Brand and reputation management The most resilient brands embrace uncertainty. Get in touch. Andrew Blau Managing Director ablau deloitte. Rhoda H. Kathryn A. Latest news from DeloitteRiskFin Sharing insights, events, research, and more. Join the conversation.

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Did you find this useful? Yes No. Forbes Insights survey: Taking aim at value Avoid overconfidence and look again at risk. Crisis leadership Guiding your organization through uncertainty and chaos. Keep me logged in. Forgot password. Connect your social accounts. This is the first time you have logged in with a social network. The authors also ruled out the explanation that lack of experience with trading would lead to the endowment effect by conducting repeated markets.

The first two alternative explanations—that under-trading was due to transaction costs or misunderstanding—were tested by comparing goods markets to induced-value markets under the same rules. If it was possible to trade to the optimal level in induced value markets, under the same rules, there should be no difference in goods markets.

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The results showed drastic differences between induced-value markets and goods markets. The median prices of buyers and sellers in induced-value markets matched almost every time leading to near perfect market efficiency, but goods markets sellers had much higher selling prices than buyers' buying prices. This effect was consistent over trials, indicating that this was not due to inexperience with the procedure or the market.

Since the transaction cost that could have been due to the procedure was equal in the induced-value and goods markets, transaction costs were eliminated as an explanation for the endowment effect. The third alternative explanation was that people have habitual bargaining behaviors, such as overstating their minimum selling price or understating their maximum bargaining price, that may spill over from strategic interactions where these behaviors are useful to the laboratory setting where they are sub-optimal. An experiment was conducted to address this by having the clearing prices selected at random.

Buyers who indicated a willingness-to-pay higher than the randomly drawn price got the good, and vice versa for those who indicated a lower WTP. Likewise, sellers who indicated a lower willingness-to-accept than the randomly drawn price sold the good and vice versa.

This incentive compatible value elicitation method did not eliminate the endowment effect but did rule out habitual bargaining behavior as an alternative explanation. Income effects were ruled out by giving one third of the participants mugs, one third chocolates, and one third neither mug nor chocolate.

They were then given the option of trading the mug for the chocolate or vice versa and those with neither were asked to merely choose between mug and chocolate.

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Thus, wealth effects were controlled for those groups who received mugs and chocolate. This ruled out income effects as an explanation for the endowment effect. Also, since all participants in the group had the same good, it could not be considered a "trophy", eliminating the final alternative explanation. Recently, studies have questioned the existence of loss aversion.


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In several studies examining the effect of losses in decision making under risk and uncertainty no loss aversion was found. Finally, losses may have an effect on attention but not on the weighting of outcomes; as suggested, for instance, by the fact that losses lead to more autonomic arousal than gains even in the absence of loss aversion. Loss aversion may be more salient when people compete.

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Gill and Prowse provide experimental evidence that people are loss averse around reference points given by their expectations in a competitive environment with real effort. Gal and Rucker made similar arguments. Loss attention refers to the tendency of individuals to allocate more attention to a task or situation when it involve losses than when it does not involve losses. What distinguishes loss attention from loss aversion is that it does not imply that losses are given more subjective weight or utility than gains.

Moreover, under loss aversion losses have a biasing effect whereas under loss attention they can have a debiasing effect. Loss attention was proposed as a distinct regularity from loss aversion by Eldad Yechiam and Guy Hochman.


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Specifically, the effect of losses is assumed to be on general attention rather than just visual or auditory attention. The loss attention account assumes that losses in a given task mainly increase the general attentional resource pool available for that task.


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The increase in attention is assumed to have an inverse-U shape effect on performance following the so called Yerkes-Dodson law. Indeed, it was found that the positive effect of losses on performance in a given task was more pronounced in a task performed concurrently with another task which was primary in its importance. Some of these effects have been previously attributed to loss aversion, but can explained by a mere attention asymmetry between gains and losses. An example is the performance advantage attributed to golf rounds where a player is under par or in a disadvantage compared to other rounds where a player is at an advantage.

Recently, studies have suggested that loss aversion mostly occur for very large losses [13] though the exact boundaries of the effect are unclear. Still, one might argue that loss aversion is more parsimonious than loss attention. Increased expected value maximization with losses — It was found that individuals are more likely to select choice options with higher expected value namely, mean outcome in tasks where outcomes are framed as losses than when they are framed as gains. Yechiam and Hochman [14] found that this effect occurred even when the alternative producing higher expected value was the one that included minor losses.

Namely, a highly advantageous alternative producing minor losses was more attractive compared when it did not produce losses. Therefore, paradoxically, in their study minor losses led to more selection from the alternative generating them refuting an explanation of this phenomenon based on loss aversion.

Loss arousal — Individuals were found to display greater Autonomic Nervous System activation following losses than following equivalent gains. Importantly, this was found even for small losses and gains where individuals do not show loss aversion. Similarly, a positive effect of losses compared to equivalent gains was found on activation of midfrontal cortical networks to milliseconds after observing the outcome. Increased hot stove effect for losses — The hot stove effect is the finding that individuals avoid a risky alternative when the available information is limited to the obtained payoffs.

A relevant example proposed by Mark Twain is of a cat which jumped of a hot stove and will never do it again, even when the stove is cold and potentially contains food.