The prospect of a perfect ending: Loss aversion and the round-number bias
The prospect of a perfect ending: Loss aversion and the round-number bias
Studies across a range of domains have shown that individuals tend to focus on round numbers as cognitive reference points; a so-called left-digit effect. We explain this effect by combining analog numerical heuristics with prospect theory in order to develop an analog value function that predicts the key characteristics of the left-digit effect. Most importantly, this value function predicts an unreported phenomenon, namely; that the left-digit effect will be more pronounced in situations involving losses (cf. gains). We confirm this prediction in both a laboratory experiment regarding hypothetical investments and analysis of buy-sell imbalances in over 15 million trades by investors in a financial market. We conclude that our analog value function is a promising explanation for the left-digit effect. Furthermore, we suggest that interventions aimed at reducing costly buy-sell imbalances in financial markets should focus on the decisions made by investors when they are facing loss.
analog value function, round-number bias, left-digit effect, heuristics
67-80
Fraser-Mackenzie, Peter
0582f787-6e98-45ec-aeb5-4e563f3f39c5
Sung, Ming-Chien
2114f823-bc7f-4306-a775-67aee413aa03
Johnson, Johnnie
6d9f1a51-38a8-4011-a792-bfc82040fac4
November 2015
Fraser-Mackenzie, Peter
0582f787-6e98-45ec-aeb5-4e563f3f39c5
Sung, Ming-Chien
2114f823-bc7f-4306-a775-67aee413aa03
Johnson, Johnnie
6d9f1a51-38a8-4011-a792-bfc82040fac4
Fraser-Mackenzie, Peter, Sung, Ming-Chien and Johnson, Johnnie
(2015)
The prospect of a perfect ending: Loss aversion and the round-number bias.
Organizational Behavior and Human Decision Processes, 131 (November 2015), .
(doi:10.1016/j.obhdp.2015.08.004).
Abstract
Studies across a range of domains have shown that individuals tend to focus on round numbers as cognitive reference points; a so-called left-digit effect. We explain this effect by combining analog numerical heuristics with prospect theory in order to develop an analog value function that predicts the key characteristics of the left-digit effect. Most importantly, this value function predicts an unreported phenomenon, namely; that the left-digit effect will be more pronounced in situations involving losses (cf. gains). We confirm this prediction in both a laboratory experiment regarding hypothetical investments and analysis of buy-sell imbalances in over 15 million trades by investors in a financial market. We conclude that our analog value function is a promising explanation for the left-digit effect. Furthermore, we suggest that interventions aimed at reducing costly buy-sell imbalances in financial markets should focus on the decisions made by investors when they are facing loss.
Text
Blind manuscript FINAL 100815.pdf
- Accepted Manuscript
More information
Accepted/In Press date: 25 August 2015
e-pub ahead of print date: 23 September 2015
Published date: November 2015
Keywords:
analog value function, round-number bias, left-digit effect, heuristics
Organisations:
Centre of Excellence in Decision, Analytics & Risk Research
Identifiers
Local EPrints ID: 381086
URI: http://eprints.soton.ac.uk/id/eprint/381086
ISSN: 0749-5978
PURE UUID: 0ab81217-15a4-45b5-89cd-ed2bc32efa1d
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Date deposited: 01 Sep 2015 11:43
Last modified: 15 Mar 2024 05:20
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Contributors
Author:
Peter Fraser-Mackenzie
Author:
Johnnie Johnson
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