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Measuring the Subjective Value of Risky and Ambiguous Options using Experimental Economics and Functional MRI Methods
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Choice by value encoding and value construction: processes of loss aversion.

Martijn C Willemsen1, Ulf Böckenholt, Eric J Johnson

  • 1Department of Industrial Engineering and Innovation Sciences, Eindhoven University of Technology, Eindhoven, the Netherlands. m.c.willemsen@tue.nl

Journal of Experimental Psychology. General
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Loss aversion arises from how we evaluate information, not just gains or losses. This study reveals cognitive processes behind biased decision-making in behavioral economics.

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Area of Science:

  • Behavioral Economics
  • Cognitive Science
  • Decision-Making Theory

Background:

  • Loss aversion and reference dependence are central to behavioral choice theories.
  • Underlying cognitive mechanisms remain largely unexplored.

Purpose of the Study:

  • To propose and test a novel 'value construction' account of loss aversion.
  • To differentiate between value encoding and value construction in decision-making.

Main Methods:

  • Development of hypotheses based on dual accounts of loss aversion.
  • Analysis of process-tracing data to examine cognitive processes.

Main Results:

  • Loss aversion stems from biased evaluations during information search and comparison.
  • Initial direct encoding of losses influences subsequent attribute valuations.

Conclusions:

  • The value construction account offers a supplementary explanation for loss aversion.
  • Cognitive biases in information processing significantly distort choices.