Prospect theory’s loss aversion is robust to stake size

Abstract

Abstract Several papers have challenged the robustness of loss aversion, claiming that it is context-dependent and disappears for small stakes. These papers use a behavioral definition of loss aversion that may be confounded by diminishing sensitivity and probability/event weighting under the new version of prospect theory (PT). We perform a new theory-based test of loss aversion that controls for these confounds. We found significant loss aversion for both small stakes and high stakes. The overall loss aversion coefficient varied between 1.25 and 1.45, less than commonly observed. Loss aversion decreased slightly for small stakes, but the effect was small and usually insignificant. Overall, our results indicate that, under PT, loss aversion is robust to stake size.

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