Thinking, Fast and Slow (60 page)

giving up a bottle of nice wine
: Strictly speaking, loss aversion refers to the anticipated pleasure and pain, which determine choices. These anticipations could be wrong in some cases. Deborah A. Kermer et al., “Loss Aversion Is an Affective Forecasting Error,”
Psychological Science
17 (2006): 649–53.

market transactions
: Novemsky and Kahneman, “The Boundaries of Loss Aversion.”

half of the tokens will change hands
: Imagine that all the participants are ordered in a line by the redemption value assigned to them. Now randomly allocate tokens to half the individuals in the line. Half of the people in the front of the line will not have a token, and half of the people at the end of the line will own one. These people (half of the total) are expected to move by trading places with each other, so that in the end everyone in the first half of the line has a token, and no one behind them does.

Brain recordings
: Brian Knutson et al., “Neural Antecedents of the Endowment Effect,”
Neuron
58 (2008): 814–22. Brian Knutson an {an utson et ad Stephanie M. Greer, “Anticipatory Affect: Neural Correlates and Consequences for Choice,”
Philosophical Transactions of the Royal Society B
363 (2008): 3771–86.

riskless and risky decisions
: A review of the price of risk, based on “international data from 16 different countries during over 100 years,” yielded an estimate of 2.3, “in striking agreement with estimates obtained in the very different methodology of laboratory experiments of individual decision-making”: Moshe Levy, “Loss Aversion and the Price of Risk,”
Quantitative Finance
10 (2010): 1009–22.

effect of price increases
: Miles O. Bidwel, Bruce X. Wang, and J. Douglas Zona, “An Analysis of Asymmetric Demand Response to Price Changes: The Case of Local Telephone Calls,”
Journal of Regulatory Economics
8 (1995): 285–98. Bruce G. S. Hardie, Eric J. Johnson, and Peter S. Fader, “Modeling Loss Aversion and Reference Dependence Effects on Brand Choice,”
Marketing Science
12 (1993): 378–94.

illustrate the power of these concepts
: Colin Camerer, “Three Cheers—Psychological, Theoretical, Empirical—for Loss Aversion,”
Journal of Marketing Research
42 (2005): 129–33. Colin F. Camerer, “Prospect Theory in the Wild: Evidence from the Field,” in
Choices, Values, and Frames
, ed. Daniel Kahneman and Amos Tversky (New York: Russell Sage Foundation, 2000), 288–300.

condo apartments in Boston
: David Genesove and Christopher Mayer, “Loss Aversion and Seller Behavior: Evidence from the Housing Market,”
Quarterly Journal of Economics
116 (2001): 1233–60.

effect of trading experience
: John A. List, “Does Market Experience Eliminate Market Anomalies?”
Quarterly Journal of Economics
118 (2003): 47–71.

Jack Knetsch also
: Jack L. Knetsch, “The Endowment Effect and Evidence of Nonreversible Indifference Curves,”
American Economic Review
79 (1989): 1277–84.

ongoing debate about the endowment effect
: Charles R. Plott and Kathryn Zeiler, “The Willingness to Pay–Willingness to Accept Gap, the ‘Endowment Effect,’ Subject Misconceptions, and Experimental Procedures for Eliciting Valuations,”
American Economic Review
95 (2005): 530–45. Charles Plott, a leading experimental economist, has been very skeptical of the endowment effect and has attempted to show that it is not a “fundamental aspect of human preference” but rather an outcome of inferior technique. Plott and Zeiler believe that participants who show the endowment effect are under some misconception about what their true values are, and they modified the procedures of the original experiments to eliminate the misconceptions. They devised an elaborate training procedure in which the participants experienced the roles of both buyers and sellers, and were explicitly taught to assess their true values. As expected, the endowment effect disappeared. Plott and Zeiler view their method as an important improvement of technique. Psychologists would consider the method severely deficient, because it communicates to the participants a message of what the experimenters consider appropriate behavior, which happens to coincide with the experimenters’ theory. Plott and Zeiler’s favored version of Kne {ers): tsch’s exchange experiment is similarly biased: It does not allow the owner of the good to have physical possession of it, which is crucial to the effect. See Charles R. Plott and Kathryn Zeiler, “Exchange Asymmetries Incorrectly Interpreted as Evidence of Endowment Effect Theory and Prospect Theory?”
American Economic Review
97 (2007): 1449–66. There may be an impasse here, where each side rejects the methods required by the other.

People who are poor
: In their studies of decision making under poverty, Eldar Shafir, Sendhil Mullainathan, and their colleagues have observed other instances in which poverty induces economic behavior that is in some respects more realistic and more rational than that of people who are better off. The poor are more likely to respond to real outcomes than to their description. Marianne Bertrand, Sendhil Mullainathan, and Eldar Shafir, “Behavioral Economics and Marketing in Aid of Decision Making Among the Poor,”
Journal of Public Policy & Marketing
25 (2006): 8–23.

in the United States and in the UK
: The conclusion that money spent on purchases is not experienced as a loss is more likely to be true for people who are relatively well-off. The key may be whether you are aware when you buy one good that you will not be unable to afford another good. Novemsky and Kahneman, “The Boundaries of Loss Aversion.” Ian Bateman et al., “Testing Competing Models of Loss Aversion: An Adversarial Collaboration,”
Journal of Public Economics
89 (2005): 1561–80.

28: Bad Events

heartbeat accelerated
: Paul J. Whalen et al., “Human Amygdala Responsivity to Masked Fearful Eye Whites,”
Science
306 (2004): 2061. Individuals with focal lesions of the amygdala showed little or no loss aversion in their risky choices: Benedetto De Martino, Colin F. Camerer, and Ralph Adolphs, “Amygdala Damage Eliminates Monetary Loss Aversion,”
PNAS
107 (2010): 3788–92.

bypassing the visual cortex
: Joseph LeDoux,
The Emotional Brain: The Mysterious Underpinnings of Emotional Life
(New York: Touchstone, 1996).

processed faster
: Elaine Fox et al., “Facial Expressions of Emotion: Are Angry Faces Detected More Efficiently?”
Cognition & Emotion
14 (2000): 61–92.

“pops out”
: Christine Hansen and Ranald Hansen, “Finding the Face in the Crowd: An Anger Superiority Effect,”
Journal of Personality and Social Psychology
54 (1988): 917–24.

“acceptable/unacceptable”
: Jos J. A. Van Berkum et al., “Right or Wrong? The Brain’s Fast Response to Morally Objectionable Statements,”
Psychological Science
20 (2009): 1092–99.

negativity dominance
: Paul Rozin and Edward B. Royzman, “Negativity Bias, Negativity Dominance, and Contagion,”
Personality and Social Psychology Review
5 (2001): 296–320.

resistant to disconfirmation
: Roy F. Baumeister, Ellen Bratslavsky, Catrin Finkenauer, and Kathleen D. Vohs, “Bad Is Stronger Than Good,”
Review of General Psychology
5 (200 {/spFac1): 323.

biologically significant improvement
: Michel Cabanac, “Pleasure: The Common Currency,”
Journal of Theoretical Biology
155 (1992): 173–200.

not equally powerful
: Chip Heath, Richard P. Larrick, and George Wu, “Goals as Reference Points,”
Cognitive Psychology
38 (1999): 79–109.

rain-drenched customers
: Colin Camerer, Linda Babcock, George Loewenstein, and Richard Thaler, “Labor Supply of New York City Cabdrivers: One Day at a Time,”
Quarterly Journal of Economics
112 (1997): 407–41. The conclusions of this research have been questioned: Henry S. Farber, “Is Tomorrow Another Day? The Labor Supply of New York Cab Drivers,” NBER Working Paper 9706, 2003. A series of studies of bicycle messengers in Zurich provides strong evidence for the effect of goals, in accord with the original study of cabdrivers: Ernst Fehr and Lorenz Goette, “Do Workers Work More if Wages Are High? Evidence from a Randomized Field Experiment,”
American Economic Review
97 (2007): 298–317.

communicate a reference point
: Daniel Kahneman, “Reference Points, Anchors, Norms, and Mixed Feelings,”
Organizational Behavior and Human Decision Processes
51 (1992): 296–312.

“wins the contest”
: John Alcock,
Animal Behavior: An Evolutionary Approach
(Sunderland, MA: Sinauer Associates, 2009), 278–84, cited by Eyal Zamir, “Law and Psychology: The Crucial Role of Reference Points and Loss Aversion,” working paper, Hebrew University, 2011.

merchants, employers, and landlords
: Daniel Kahneman, Jack L. Knetsch, and Richard H. Thaler, “Fairness as a Constraint on Profit Seeking: Entitlements in the Market,”
The American Economic Review
76 (1986): 728–41.

fairness concerns are economically significant
: Ernst Fehr, Lorenz Goette, and Christian Zehnder, “A Behavioral Account of the Labor Market: The Role of Fairness Concerns,”
Annual Review of Economics
1 (2009): 355–84. Eric T. Anderson and Duncan I. Simester, “Price Stickiness and Customer Antagonism,”
Quarterly Journal of Economics
125 (2010): 729–65.

altruistic punishment is accompanied
: Dominique de Quervain et al., “The Neural Basis of Altruistic Punishment,”
Science
305 (2004): 1254–58.

actual losses and foregone gains
: David Cohen and Jack L. Knetsch, “Judicial Choice and Disparities Between Measures of Economic Value,”
Osgoode Hall Law Review
30 (1992): 737–70. Russell Korobkin, “The Endowment Effect and Legal Analysis,”
Northwestern University Law Review
97 (2003): 1227–93.

asymmetrical effects on individual well-being
: Zamir, “Law and Psychology.”

29: The Fourfold Pattern

and other disasters
: Including exposure to a “Dutch book,” which is a set of gambles that your incorrect preferences commit you to accept an { to>

puzzle that Allais constructed
: Readers who are familiar with the Allais paradoxes will recognize that this version is new. It is both much simpler and actually a stronger violation than the original paradox. The left-hand option is preferred in the first problem. The second problem is obtained by adding a more valuable prospect to the left than to the right, but the right-hand option is now preferred.

sorely disappointed
: As the distinguished economist Kenneth Arrow recently described the event, the participants in the meeting paid little attention to what he called “Allais’s little experiment.” Personal conversation, March 16, 2011.

estimates for gains
: The table shows decision weights for gains. Estimates for losses were very similar.

estimated from choices
: Ming Hsu, Ian Krajbich, Chen Zhao, and Colin F. Camerer, “Neural Response to Reward Anticipation under Risk Is Nonlinear in Probabilities,”
Journal of Neuroscience
29 (2009): 2231–37.

parents of small children
: W. Kip Viscusi, Wesley A. Magat, and Joel Huber, “An Investigation of the Rationality of Consumer Valuations of Multiple Health Risks,”
RAND Journal of Economics
18 (1987): 465–79.

psychology of worry
: In a rational model with diminishing marginal utility, people should pay at least two-thirds as much to reduce the frequency of accidents from 15 to 5 units as they are willing to pay to eliminate the risk. Observed preferences violated this prediction.

not made much of it
: C. Arthur Williams, “Attitudes Toward Speculative Risks as an Indicator of Attitudes Toward Pure Risks,”
Journal of Risk and Insurance
33 (1966): 577–86. Howard Raiffa,
Decision Analysis: Introductory Lectures on Choices under Uncertainty
(Reading, MA: Addison-Wesley, 1968).

shadow of civil trials
: Chris Guthrie, “Prospect Theory, Risk Preference, and the Law,”
Northwestern University Law Review
97 (2003): 1115–63. Jeffrey J. Rachlinski, “Gains, Losses and the Psychology of Litigation,”
Southern California Law Review
70 (1996): 113–85. Samuel R. Gross and Kent D. Syverud, “Getting to No: A Study of Settlement Negotiations and the Selection of Cases for Trial,”
Michigan Law Review
90 (1991): 319–93.