NEW YORK – Research on consumer behavior reveals that fear is a common trait: From the senior citizen on a fixed income to the wealthy stock trader, consumers are more motivated by the potential of losing money than by the opportunity to turn a profit. Research from Columbia Business School’s Center for Decision Sciences finds that loss aversion – the anxiety of a potential loss outweighing the desire to pursue an equal gain – is broadly present across the spectrum of consumers, but it greatly varies based on demographics including age, education level and household financial experience.  

Leading critics have recently argued that the concept of loss aversion is obsolete and “essentially a fallacy”, alleging that attempts to persuade buyers by playing on their fear of losing out has no measurable impact on their purchasing decisions. But the research team of Columbia Business School 's Professor Eric Johnson, the Norman Eig Professor of Business and postdoctoral research scientist Kellen Mrkva, Professor Simon Gächter of the University of Nottingham, and Professor Andreas Herrmann of the University of St. Gallen breaks new ground on buying habits, demonstrating that consumers with more knowledge, higher levels of education, and more sophisticated investments have less fear of loss. In Moderating Loss Aversion: Loss Aversion Has Moderators, But Reports of its Death are Greatly Exaggerated, they also show that loss aversion increases as consumers get older.

“There’s been pushback recently against the very idea of behavioral economics and loss aversion in particular,” said Professor Johnson, the director of Columbia Business School's Center for Decision Sciences. “But our research shows that the vast majority of people are loss averse, contrary to the recent pushback and criticism. Our research reinforces the fact that knowledge, experience and age have a big impact on how consumers look at risk.”

Researchers developed their findings through two separate tests to identify levels of loss aversion, identifying characteristics that amplify or alleviate the anxiety. In the first test, researchers interviewed 360 car buyers living in Austria, Germany and Switzerland who recently purchased mid-sized family sedans. Survey results showed that consumers with more car knowledge and driving experience were less loss averse. This made them more willing to part with premium car features to get a better deal and more willing to take coin flip gambles in which the gains were larger than the losses.

In the second study, researchers evaluated survey data from 17,000 American households where respondents reported their age, education, and detailed investment history, including stock holdings and credit card debt. All of the respondents were asked if they’d consider taking a chance on a risky investment. The vast majority demonstrated loss aversion, but those with more experience making household financial decisions – such as managing investments and paying bills – had lower levels of loss aversion compared to respondents with limited experience.

Both test cases find that a consumer’s age is key as older respondents were found to be more loss averse. According to the researchers, older individuals are more likely to avoid small losses by hoarding items that provide little real value to them.

The research team argues that these findings broadly carry over to other markets, such as sports memorabilia. A hockey fan, for example, will have lower levels of loss aversion when evaluating the purchase of a vintage hockey jersey, compared to a collectible football helmet.

“Data shows that loss aversion is real – even for millionaires,” said postdoctoral research scientist Kellen Mrkva, the study’s lead author. “Investors, consumer industry leaders and policymakers need to embrace this element of economic behavior as loss aversion fluctuates in consumers based on age, education and other factors previously not explored.”

To learn more about the cutting-edge research being conducted at Columbia Business School, please visit www.gsb.columbia.edu.

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