DP9183 Loss Aversion and Consumption Choice: Theory and Experimental Evidence

Author(s): Heiko Karle, Georg Kirchsteiger, Martin Peitz
Publication Date: October 2012
Keyword(s): Contextual Reference Points, Loss Aversion, Reference-Dependent Utility
JEL(s): C91, D01, D11, D83
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9183

In this paper we analyze a consumer choice model with price uncertainty, loss aversion, and expectation-based reference points. The implications of this model are tested in an experiment in which participants have to make a consumption choice between two sandwiches. We make use of the fact that participants diff er in their reported taste difference between the two sandwiches and the degree of loss aversion which we measure separately. We find that more loss-averse participants are more likely to opt for the cheaper sandwich provided that their reported taste difference is below some threshold, confirming the model?s predictions.