Monday, June 15, 2009

Loss aversion

In the new edition of our textbook ,we have a discussion of psychological theories of pricing, including what is known as "loss aversion" from prospect theory. Apparently this behavioral theory explains why pro golfers make more par putts than birdie putts:
Even the world’s best pros are so consumed with avoiding bogeys that they make putts for birdie discernibly less often than identical putts for par, according to a coming paper by two professors at the University of Pennsylvania’s Wharton School. After analyzing laser-precise data on more than 1.6 million Tour putts, they estimated that this preference for avoiding a negative (bogey) more than gaining an equal positive (birdie) — known in economics as loss aversion — costs the average pro about one stroke per 72-hole tournament, and the top 20 golfers about $1.2 million in prize money a year

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