Quotation Stephens, Thomas Alexander, Tyran, Jean-Robert. 2014. Loss Aversion, Money Illusion and Asset Allocation. The 5th Annual Xiamen University International Workshop on Experimental Economics, Xiamen, China, 12.12-14-12.


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Abstract

Loss aversion is one of the most robust findings to have emerged from research in behavioural economics. However, despite the wealth of evidence that 'losses loom larger than gains', surprisingly little attention has been given to the role of money illusion in the selection of reference points, and hence perceptions of gains and losses. We address this issue through a combination of experimental and empirical analysis. We conduct a survey experiment with a large, heterogeneous sample of the Danish population, and link the experimental results to asset data from official registers. In the experiment, we ask subjects to evaluate hypothetical housing transactions, all of which involve real losses. However, we vary inflation so that a given real loss is presented as both a nominal loss and a nominal gain. We find systematic bias in evaluations, with real losses viewed more favourably when they are hidden by inflation. This bias is linked to measures of cognitive ability and cognitive reflection, but is distinct from them. In addition, our empirical analysis reveals that subjects who are more responsive to the high inflation treatment in the experiment hold more of their gross wealth in assets that are protected from nominal, but not real, losses. This result is robust to controls for total wealth, age, income and other relevant demographic, as well various psychometrics, including cognitive ability and cognitive reflection.

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Publication's profile

Status of publication Published
Affiliation WU
Type of publication Paper presented at an academic conference or symposium
Language English
Title Loss Aversion, Money Illusion and Asset Allocation
Event The 5th Annual Xiamen University International Workshop on Experimental Economics
Year 2014
Date 12.12-14-12
Country China
Location Xiamen
URL http://wise.xmu.edu.cn/meetings/Experimental2014/

Associations

People
Stephens, Thomas Alexander (Former researcher)
External
Tyran, Jean-Robert (Universität Wien, Austria)
Organization
Department of Economics (Sausgruber) (Details)
Research areas (ÖSTAT Classification 'Statistik Austria')
5300 Economics (Details)
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