Monday, February 5, 2007

Loss aversion in decision-making

Prospect theory, a behavioral model of decision making under risk and uncertainty, explains risk aversion for mixed (gain/loss) gambles using the concept of loss aversion: People are more sensitive to the possibility of losing money than they are to gaining the same amounts of money; the subjective impact of losses is roughly twice that of gains. In a recent Science article a team from UCLA shows how neuroimaging can be used to directly rest predictions from behavioral theories.

In their paper The Neuronal Basis of Loss Aversion in Decision-Making Under Risk , in Science Volume 315, 26 January 2007 pp. 515–518 (subscription required), Sabrina Tom, Craig Fox, Christopher Trepel, and Russell Poldrack collected functional magnetic resonance imaging (fMRI) data while participants decided whether to accept or reject mixed gambles that offered a 50/50 chance of either gaining one amount of money or losing another amount.

Their study shows that in the context of decision-making, potential losses are represented by decreasing activity in regions that seem to code for subjective value rather than by increasing activity in regions associated with negative emotions. In other words, loss aversion does not appear to be driven by a negative affective response, such as fear, vigilance, discomfort, or anxiety.

Finally, their results provide evidence in favor of one of the fundamental claims of prospect theory, namely that the function that maps money to subjective value is markedly steeper for losses than gains.

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