On loss aversion, level-1 reasoning, and betting

Ido Erev, Sharon Gilat-Yihyie, Davide Marchiori, Doron Sonsino

Research output: Contribution to journalArticlepeer-review


Previous research suggests that human reaction to risky opportunities reflects two contradicting biases: “loss aversion”, and “limited level of reasoning” that leads to overconfidence. Rejection of attractive gambles is explained by loss aversion, while counterproductive risk seeking is attributed to limited level of reasoning. The current research highlights a shortcoming of this popular (but often implicit) “contradicting biases” assertion. Studies of “negative-sum betting games” reveal high rate of counterproductive betting even when limited level of reasoning and loss aversion imply no betting. The results reflect two reasons for the high betting rate: initial tendency to participate and slow learning. Under certain conditions, the observed betting rate was higher than the rate predicted under random choice even after 250 trials with immediate feedback. These results can be captured with a model that assumes a tendency to select strategies that have led to good outcomes in a small set of similar past experiences, and allows for an initial framing effect.

Original languageEnglish
Pages (from-to)113-133
Number of pages21
JournalInternational Journal of Game Theory
Issue number1
StatePublished - 1 Apr 2015


  • Acquiring a company problem
  • Level-1 reasoning
  • Loss aversion
  • Market for lemons
  • Samuelson’s colleague

All Science Journal Classification (ASJC) codes

  • Statistics and Probability
  • Mathematics (miscellaneous)
  • Social Sciences (miscellaneous)
  • Economics and Econometrics
  • Statistics, Probability and Uncertainty


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