Understanding Loss Aversion: An Experimental Study on Decision Making (A case study of Economics and Management Students at University of Malakand)

Abstract

Loss aversion is a cognitive bias in behavioral economics explaining deviations from traditional rational choice theory. The current study aims to precisely examine the degree of loss aversion and associated qualitative factors such as reasons for keeping the endowed item or opting for risky options, self-reported confidence of respondents and their familiarity with behavioral economics.  It addresses a notable gap in existing literature of studying this phenomena in the South Asian context. Empirical evidence of loss aversion is provided by employing a unified experimental design with 112 undergraduate students in four equal subsets of 28 from the Departments of Economics, Commerce, and Management at the University of Malakand. In a meticulously designed risk task, participants consistently preferred the certain outcome of retaining their endowed item over the uncertain alternative of exchanging it for mystery boxes with potential monetary gain. The statistical analysis mainly based on Chi-Square (χ2) tests, supported these results. Most of the participants irrespective of whether they showed loss averse or risk taking behavior reported higher level of confidence in their decision making. The participants selected attachment to the endowed item and fear of losing it, as two major reasons for not exchanging it with mystery boxes. The major reason for the decision of taking risk was to avail the opportunity to have greater monetary reward of PKR 400. The study provides important insights into loss aversion in the South Asian context and have implications for effective educational and policy interventions.