Monday, February 4, 2019

Evidence of loss aversion in Golf

Loss aversion refers to irrational decisions that are made to avoid perceived losses, rather than maximize expected value (which weights losses and gains equally).  This paper finds "that golfers are more likely to protect par (the number of strokes that an average highly-skilled player should take to complete a hole) than they are to make birdies (a score of one less than par)."

Note that such loss aversion requires a "target" like par, around which losses and gains are measured.  When par changes on a hole, e.g., from 5 to 4,  professional golfers are likely to make sure they make par, rather than take a chance on making a birdie, even when doing so would be optimal from an expected value point of view. 

Businesses react to consumer loss aversion, e.g., when companies frame variable pricing as a discount from a normally high price, rather than framing the exact same pricing as an increase from a normally low price.