The objective of this paper is to understand the drivers of consumer choice under risk. We disentangle and study the relative importance of di erent preferences in explaining the high risk premia consumers pay for actuarially unfair insurance. Empirical and behavioral research on insurance is at odds on whether diminishing returns (curvature of the utility function), or loss aversion and non-li...

We study a newsvendor who sells a perishable asset over repeated sales seasons to loss averse consumers. We identify conditions under which the expected price can be increasing in the consumer loss aversion level, and numerically show that the firm can prefer low and moderate levels of demand variability over no demand uncertainty. Moreover, we obtain a set of counterintuitive insights on how c...

Deferred acceptance (DA), a widely implemented algorithm, is meant to improve allocations: under classical preferences, it induces preference-concordant rankings. However, recent evidence shows that—in both real, large-stakes applications and experiments—participants frequently play seemingly dominated, significantly costly strategies that avoid small chances of good outcomes. We show theoretic...

Is the pain of a loss greater in magnitude than pleasure comparable gain? Studies that compare positive feelings about gain with negative have found mixed answers to this question. The can be than, less or equal gain. We offer new approach test hedonic aversion. This method uses emotional reactions reference point, change, and change. When we manipulated point (i.e., pleasurable painful), two d...

This article explains the high level and the countercyclical variation of the equity premium in a consumption-based asset pricing model with low large-scale risk aversion. Investors have gain-loss utility over consumption relative to slowly time-varying habit. Stocks deliver low returns in recessions when consumption falls below habit; investors therefore require a high premium for holding stoc...

A growing literature reports the conclusions that: (a) expected utility theory does not provide a plausible theory of risk aversion for both small-stakes and large-stakes gambles; and (b) this decision theory should be replaced with an alternative theory characterized by loss aversion. This paper explains that the arguments in previous literature fail to support these conclusions. Either concav...

The principle of loss aversion is thought to explain a wide range of anomalous phenomena involving tradeoffs between losses and gains. In this article, I show that the anomalies loss aversion was introduced to explain — the risky bet premium, the endowment effect, and the status-quo bias — are characterized not only by a loss/gain tradeoff, but by a tradeoff between the status-quo and change; a...