The Effect of Wealth Shocks on Loss Aversion: Behavior and Neural Correlates

Frontiers in Neuroscience
V S Chandrasekhar PammiRanganatha Sitaram

Abstract

Kahneman and Tversky (1979) first demonstrated that when individuals decide whether or not to accept a gamble, potential losses receive more weight than possible gains in the decision. This phenomenon is referred to as loss aversion. We investigated how loss aversion in risky financial decisions is influenced by sudden changes to wealth, employing both behavioral and neurobiological measures. We implemented an fMRI experimental paradigm, based on that employed by Tom et al. (2007). There are two treatments, called RANDOM and CONTINGENT. In RANDOM, the baseline setting, the changes to wealth, referred to as wealth shocks in economics, are independent of the actual choices participants make. Under CONTINGENT, we induce the belief that the changes in income are a consequence of subjects' own decisions. The magnitudes and sequence of the shocks to wealth are identical between the CONTINGENT and RANDOM treatments. We investigated whether more loss aversion existed in one treatment than another. The behavioral results showed significantly greater loss aversion in CONTINGENT compared to RANDOM after a negative wealth shock. No differences were observed in the response to positive shocks. The fMRI results revealed a neural loss aversio...Continue Reading

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Citations

Jul 10, 2020·Social Cognitive and Affective Neuroscience·Stefan SchulreichHauke R Heekeren
Mar 25, 2019·Scientific Reports·Jianmin ZengLi Su

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Software Mentioned

RANDOM
COGENT
CONTINGENT

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