Daniel Kahneman - US grants

This project investigates loss aversion, which is one of the central concepts in the decision making and behavioral economics literatures. Loss aversion is said to occur when a loss of a given magnitude has more influence on choices than does a gain of the same magnitude (for example, most people will refuse a gamble with equal chances to gain or lose $100). Numerous studies have shown that loss aversion plays a key role in important real-world phenomena, such as the endowment effect, the status quo bias, the equity-premium puzzle in financial economics, the tendency to hold on to 'losing' stocks while selling 'winners', the discrepancy between valuations of public (especially environmental) goods by willingness-to-pay for them or by the compensation demanded to give them up, legal principles of compensation for damage, failures of negotiations, and many others.
This project investigates whether a positive-negative asymmetry analogous to loss aversion occurs in the experience of decision outcomes (i.e., is loss aversion a mistake?). Preliminary evidence reported in the project description suggests that experiences of decision outcomes do not always show the good-bad asymmetry that would be expected from loss aversion. If loss aversion turns out to be a mistake, this work would require a major rethinking of the nature of loss aversion, a concept that is currently taught to almost every business student in the United States, and which plays an important role in many other social science curricula, including economics, public policy, law, and psychology. In addition, the possibility that loss aversion in choices could in some cases be a mistake, in the sense that it does not reflect an asymmetry in experience, would require a wide-ranging reanalysis of the many practical decisions where loss aversion has been found to play a significant role.

ABSTRACT

Principal investigator: Schkade, David
Institution: University of Texas at Austin
Proposal ID : 0213481
Proposal Title: Collaborative Research: Understanding loss aversion

This project investigates loss aversion, which is one of the central concepts in the decision making and behavioral economics literatures. Loss aversion is said to occur when a loss of a given magnitude has more influence on choices than does a gain of the same magnitude (for example, most people will refuse a gamble with equal chances to gain or lose $100). Numerous studies have shown that loss aversion plays a key role in important real-world phenomena, such as the endowment effect, the status quo bias, the equity-premium puzzle in financial economics, the tendency to hold on to 'losing' stocks while selling 'winners', the discrepancy between valuations of public (especially environmental) goods by willingness-to-pay for them or by the compensation demanded to give them up, legal principles of compensation for damage, failures of negotiations, and many others.
This project investigates whether a positive-negative asymmetry analogous to loss aversion occurs in the experience of decision outcomes (i.e., is loss aversion a mistake?). Preliminary evidence reported in the project description suggests that experiences of decision outcomes do not always show the good-bad asymmetry that would be expected from loss aversion. If loss aversion turns out to be a mistake, this work would require a major rethinking of the nature of loss aversion, a concept that is currently taught to almost every business student in the United States, and which plays an important role in many other social science curricula, including economics, public policy, law, and psychology. In addition, the possibility that loss aversion in choices could in some cases be a mistake, in the sense that it does not reflect an asymmetry in experience, would require a wide-ranging reanalysis of the many practical decisions where loss aversion has been found to play a significant role.

In response to the "Improved Measures and Methodologies" topic (#24) of the NIA Pilot Research Grant Program Announcement, a study is proposed with the objective of developing and testing a new approach to the measurement of well-being. The uniqueness of this technique is that it will seek to assess well-being in terms that are closer to the utility or affective/hedonic quality and intensity of people' s diverse, subjective experiences, rather than in terms of their global retrospective satisfaction with their lives, which is the current practice. The proposed project will also permit an initial examination of the feasibility of this new survey measure for setting up a "National Well-Being Account" as an index of the welfare of society. Such an account would provide a much-needed supplement to the purely economic data that are currently used in the National Income and Products Account. To achieve these goals, a measure of experienced utility is needed. An earlier effort developed and tested a measure of experienced utility, the Day Recall Questionnaire (DRQ), which elicits reports of the experienced utility during a particular day in a respondent's life. While tile DRQ performs well, it is too cumbersome for use in large-scale surveys. We therefore propose to test a simpler questionnaire technique, which we call the Generic Situations Questionnaire (GSQ), that could capture the essential information obtained from the DRQ, yet be brief enough to be feasible for use in large surveys. In the proposed questionnaire, people are asked to evaluate generic situations (e.g., "Sunday moming", "commuting") rather the than specific events they happened to experience the day before. The proposed study will be conducted on a diverse sample of 500 adult women, who will complete both the GSQ and DRQ instruments. The key test of the feasibility of the GSQ will be its correspondence to the DRQ across differing situations and socio-economic circumstances (e.g., young/old, rich/poor, single/married/divorced).

DESCRIPTION (provided by applicant): We propose to create a new NIA Roybal Center at Princeton University called the Center for Research on Experience and Well Being (CREW), with the overall objectives of (1) developing new methods for the measurement of well-being and health and (2) using them to better understand and document the experience of aging. We propose that a shift to a bottom-up conceptualization of well-being will enhance our ability to understand numerous facets of the aging process by clearly separating actual experiences of daily life from the cognitive processes that give rise to reports of life satisfaction or overall happiness. Application of bottom-up methods will also improve our understanding of apparent anomalies in self-reported well-being and health and provide insights into the process of adaptation to changing circumstances. These new methods allow a detailed analysis of the contribution of different circumstances (e.g., chronic disease, widowhood) and situations (e.g., working, socializing with friends) to the overall quality of life, and of how these contributions change over a person's life cycle. The combination of measurements of the affective experience of situations and activities (e.g., commuting, housework) with measurements of the time spent by the population in these activities, currently collected by the Department of Labor Statistics, could eventually contribute to the development of an experimental system of National Well-being Accounts. The proposed pilot work develops the methodological and conceptual basis of subsequent proposals. As per the goals of the Roybal RFA, we will not definitively answer all of the questions addressed in the proposal, but will collect pilot data to support subsequent large-scale studies.