Studies of Loss Aversion and Perceived Necessity

Abstract

An explanation of the loss-aversion function of prospect theory that relates the theory to a distinction between positive-based and negative-based incentive value was investigated. We predicted that betting decisions would show loss aversion to the extent that they involved necessary goals—goals that were more likely to be negatively based (associated with a threat of negative alternatives). Therefore, conditions that increased perceived goal necessity should have increased the magnitude of the loss-aversion effect. The results from 194 subjects in two studies supported this prediction. Factors related to perceived goal necessity (e.g., telic dominance, imagined proportion of financial assets to be gambled, proportion of assets in a necessities account, actual proportion of income spent on necessities) were related to reluctance to take hypothetical bets. Relationships seemed to be contingent on bet characteristics (amount and win-loss ratio). A third study suggested that these results reflected loss aversion rather than risk aversion.