Psychological mechanisms of loss aversion: A drift-diffusion decomposition

Area of Science:

• Cognitive Psychology
• Decision Science
• Behavioral Economics

Background:

• Decision makers frequently reject mixed gambles with equal gain and loss probabilities, a phenomenon known as loss aversion.
• Prospect theory explains loss aversion by positing higher utility weights for losses than gains.
• Alternative psychological mechanisms for loss aversion remain underexplored.

Purpose of the Study:

• To investigate alternative psychological mechanisms, specifically a fixed utility bias and a pre-valuation bias, that may explain loss aversion.
• To conceptually distinguish, formally define, and empirically measure these mechanisms using a drift diffusion model.

Main Methods:

• Utilized a drift diffusion model to analyze decision-making processes.
• Conducted two preregistered experiments to empirically test the proposed mechanisms.
• Measured the contribution of the pre-valuation bias to model fits and response time patterns.

Main Results:

• The pre-valuation bias significantly contributed to model fits, outperforming other mechanisms.
• This bias accurately predicted response time patterns and reflected prior expectations of gamble desirability.
• The pre-valuation bias could be manipulated independently of the gamble valuation process.

Conclusions:

• Loss aversion arises from multiple psychological mechanisms, with the pre-valuation bias being a fundamental determinant.
• Findings challenge the sole reliance on prospect theory for explaining loss aversion.
• Results have significant implications for modeling risky choice behavior and its neurobiological correlates.