The Impact of Loss Aversion on Optimal Prevention

Serge Macé; Richard Peter

doi:10.2139/ssrn.3882200

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The Impact of Loss Aversion on Optimal Prevention

Working paper

Open access

The Impact of Loss Aversion on Optimal Prevention

Serge Macé and Richard Peter

SSRN

07/12/2021

DOI: 10.2139/ssrn.3882200

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https://doi.org/10.2139/ssrn.3882200View

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Abstract

We analyze how loss aversion affects prevention in Köszegi and Rabin's (2007) choice-acclimating personal equilibrium. Individuals take into account the financial consequences of prevention but also expected sensations of disappointment or elation against a stochastic reference point. Loss aversion raises optimal prevention if the loss probability is below a threshold value and lowers it otherwise. We characterize this threshold and find that, under plausible conditions, it is large enough for the positive effect to dominate. We also introduce a status-quo bias, which makes individuals more sensitive to the occurrence of a loss. The status-quo bias increases the probability threshold, making the positive effect of loss aversion on prevention even more prevalent

loss aversion

choice-acclimating personal equilibrium

reference-dependent risk preferences

prevention

self-protection

Details

Title: Subtitle: The Impact of Loss Aversion on Optimal Prevention
Creators: Serge Macé
Richard Peter
Resource Type: Working paper
DOI: 10.2139/ssrn.3882200
Publisher: SSRN
Number of pages: 42 pages
Language: English
Date posted: 07/12/2021
Academic Unit: Economics; Finance
Record Identifier: 9984462913002771

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