3.8 Article

Heterogeneity in loss aversion: evidence from field elicitations

Journal

AGRICULTURAL FINANCE REVIEW
Volume 77, Issue 1, Pages 196-216

Publisher

EMERALD GROUP PUBLISHING LTD
DOI: 10.1108/AFR-05-2016-0045

Keywords

Loss aversion; Prospect theory; Heterogeneity; Gaussian mixture model; Behavioural economics; Expectation maximization

Funding

  1. USDA-Economics and Management of Risk in Agriculture and Natural Resources [SCC-76]
  2. USDA-Agricultural and Rural Finance Markets in Transition [NC-1177]
  3. USDA National Institute of Food and Agriculture Hatch Projects [RI00H-108, 229284, RI0017-NC1177, 1011736]
  4. USDA ERS Cooperative Research [58-6000-5-0091]

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Purpose - Prospect theory is now widely accepted as the dominant model of choice under risk, but has not been fully incorporated into applied research because of uncertainty about how to include population-level parameter estimates. The purpose of this paper is to characterize heterogeneity across people to lay a foundation for future applied research. Design/methodology/approach - The paper uses elicitation data from field experiments in Vietnam to fit a finite Gaussian mixture model using the expectation maximization algorithm. Applied results are simulated for investment allocations under myopic loss aversion. Findings - The authors find that about 20 percent of the sample is classified as extremely loss averse, while the rest of the population is only mildly loss averse. This implies a bimodal distribution of loss aversion in the population. Research limitations/implications - The data set is only moderately sized: 181 subjects. Future research will be needed to extend these results out of sample, and to other regions. Originality/value - This paper provides empirical evidence that heterogeneity matters in prospect theory modeling. It highlights how policy makers might be misled by assuming that average prospect theory parameters are typical within the population.

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