What Is Reduction Aversion Economics Essay

According to the decision theory in economics, loss aversion is often referred to peoples tendency to mitigate deficits as much as possible to acquiring benefits. Studies claim that, psychologically, loss are twice as powerful as increases. Therefore loss aversion causes risk aversion when people evaluate the possible gain (a risk averse person when presented with options would agree to the option less in preference to the high-risk option) this is because most somewhat than make profits, they would rather avoid losses. This further talks about the concave curve form of the chance theory power graph; conversely people want to mitigate loss. Reduction aversion may also be explained by sunk cost, economist defines sunk cost as costs which do not range according to a particular decision. For example Kehinde will pay 10 pounds for a sneaker, and she evolves blisters on her behalf leg and is constantly on the wear the sneaker in order never to lose 10 pounds, relatively loss aversion means that person who loses 10 pounds will eventually lose more satisfaction than another person who increases 10 pounds. It is central to know that it doesn't matter how a purchase is framed that is reduction or gain they have a relevant effect on consumer behavior. However traditional economists consider this "endowment effect"(people are prepared to pay more to preserve for something they'll own than to acquire something owned by somebody else) and some other effect of reduction aversion is irrational.

The articles to be discussed will expansiate further on the idea of loss aversion that is why people seem to hate losing more than earning by talking about how convincing the two studies are, one article is on "abstract reward and consequence representations in the individuals orbitofrontal cortex" and the other article is on "modeling loss aversion and reference dependence results on brand choices". We shall further consider what criticisms may be made to both studies and consider to what extent their conclusions overlap, and what aspects of each analysis are unique to the approach used and what can be gained from that approach which would not be possible otherwise.

The review on the abstract reward and punishment representation in the individuals orbitofrontal cortex is dependant on neuroscience methodology and this we can say is experimental predicated on observation. It is measured in individual subject by performing a visual reversal learning job in which selections of the right stimulus led to monetary praise and incorrect selection of the stimulus led to a monetary reduction. Neurophysiological investigations in non-human primates disclosed that the compensation value of flavour, olfactory and visual stimuli is signified in the orbitofrontal cortex and some neurons respond only once reinforcement contingencies changes. Like Family pet (Positron Emission Tomography) imaging studies found that OFC can be activated with monetary compensation and hesitates on whether abstract consequence is triggered by OFC. Monetary loss and profits were distributed ranging from worthwhile stimulus (S+) and punishing stimulus (S-), choosing S+ much larger incentive and S- smaller punishment. The results confirmed that whenever the reward acquisition period were compared to the punish reversal, there was a significant activated voxel in the medial OFC that was a genuine reaction to the receipt of a reward and the left medial OFC activation was correlated with the magnitude of the compensation following the stimulus has been selected. Finding further suggested that an increase in neural activity in the medial OFC relates to magnitude of the reward. Contrasting the punishing results of the brain activity, there was activation in the right hemisphere, the lateral OFC, that was correlated with the magnitude of punishment as regards the stimulus preferred. Findings from Edmund (2000) also understood that the ventral or object-processing visual stream, taste, olfactory and somatosensory inputs transmits information to the orbitofrontal cortex. Further, it was seen that the orbitofrontal cortex was triggered with enjoyable touch and by satisfying and aversive tastes. There was immediate facts that the compensation value flavour is symbolized in the orbitofrontal cortex and the replies are modulated by cravings for food. In contract with this results G Thul, et. al(1997) found that the orbitofrontal cortex is activated with a financial compensation. In overall, this indicates that some sense organs react whenever a consumer benefits and loose, and the magnitude of response of the nerves is increased or decreased based on the size or amount of increases or losses.

The research further reported that the lateral OFC is more involved in representing the punishing effects of continuing to select the previously rewarded stimulus following reversal, this justifies the difficulty in reversing replies to the old S+ following reversal and this talks about why consumers feel more pain when faced with a loss in comparison to when they realize a gain. Furthermore, Elliot et. al (2000) reported a disassociation between the medial and lateral OFC saying that the medial OFC is involved with monitoring and positioning in mind compensation values and immediate evidence suggests the medial OFC was turned on by monetary reward and revealed less bold sign relative to the baseline following a punishment of financial loss. This points out further the reason why people appear to hate shedding more than they like to win as the medial OFC is acclimatized to get reward and therefore when the occurrence of a abuse occurs, the consumers feel more injure therefore of losing unpredicted. Also the activation of the lateral OFC even following a previous prize is reflective of the abuse through the monetary lose experienced.

However, some critics were found, it was accepted that the spot as a whole receives highly processed sensory afferents which participates in high-level cognitive and mental functions (Ongur and price 2000). As some other voxels like the second-rate prefrontal sulcus was triggered during pay back reversal and abuse acquisition which may be engaged in inhibiting inappropriate behavioral strategies, such concerning switch behavior. This therefore means that, it can't be emphatically concluded that the activation of these nerves were as a result of the pay back or reduction, but other emotion related feeling resulted in the choices preferred.

The second article which is modeling damage aversion and dependence effects on brand choice illustrates the idea that consumers often examine product attributes relative to some research level and not simply in conditions of absolute feature levels. These claim that changes from theses research factors may be respected differently depending if they are profits or losses relative to some reference point. It really is commonly known that consumer use a guide price when examining price from different ranges of price. That's that consumer put more focus on price above the research price (recognized deficits) than prices below it (increases) (Markko and Marje 2009). Dynamic rates problem reported that consumers purchase decisions are dependent or displayed by their past purchase price called reference price, which is assumed that consumer reference point price is a weighted average of the cheapest and previous price. Benefits or damage perceptions regarding this guide price are based on consumer purchase options (Javad and Ionna 2009).

One important characteristics of the value function of an individual attribute circumstance is reduction aversion. The worthiness function is steeper for loss than for benefits, in order words a damage diminishes value more than an equal sized gain increase value. The illustration from the newspaper considers the product orange drink with two characteristics price and quality, with price tagged so a lower price is better and three reference point p q and r. This research point are all equal on quality but differing on price, launching product x and y, when evaluated from a reference point q, a consumer is indifferent concerning the two. Therefore damage aversion suggests that indifference curves are steeper that is they slope downward when they stand for losses in accordance with the research point. So when evaluated from reference point point r, the buyer prefers x, because y has a drawback (damage) on price and x loses its price advantages. So the transfer in the reference point point takes away x price benefit and create a cost disadvantage for y of the same magnitude. This loss aversion indicates that the new downside of y outweigh the forfeiture x's price edge inferring on the reason why consumer hate losing than they enjoy wining.

The findings indicated that when quality and prices are higher people steal share from lower price, but when prices are lower there's a little switching down by consumers. The intuition of reduction aversion is discussed by asymmetric response to price promotion as the research study for orange drink market which was used where Tropicana Regular, the low price and Minute Maid, the bigger price and the research brand which was Citrus Hill. Minute Maid could draw more consumers to their product by the 12 percent chop which is sufficient to go the brand on the same indifference curve as the reference brand. While Tropicana Regular was low in quality and may not match the reference brand therefore still governed by reduction aversion for quality. Since the damage aversion coefficient for quality is much greater than that for price, the equivalent price cut leaves Tropicana Regular still relatively unattractive. Therefore means that consumers are loss averse to quality and hate to go through losses as regards quality than enjoy gaining or winning less price for a low quality product in accordance with their reference brand. However criticisms has been made declaring that the definition of the guide brand is imperfect and further improvements can be produced as the justification to the reference point brand is merely simple operationalization. Also the model assumes homogeneity in response to marketing mix variables however the model captured heterogeneity in household's respond to marketing parameters therefore suggesting that estimations of damage aversion coefficient will reduce when such heterogeneity is modeled. Furthermore homogeneity in each damage aversion coefficient was assumed for each and every attribute but it might be better to permit them vary across homeowners and seen that the degree of reduction aversion may be common across individuals and some may be specific specific. Last but not least the model didn't allow test of diminishing marginal sensitivity and for that reason it is important to note that comparative and absolute assessments must are likely involved in consumer choice.


Both approach to assess the amount of reduction aversion were unique as the neuroscience talks about that different nerves in the brain explains the response to stimulus of receiving an incentive or a consequence and the constant function of selecting earlier stimulus explains the amount of damage aversion. As the traditional approach points out the amount of loss aversion as regards quality and price and observed that the amount of damage aversion is a lot more related to quality than price. Both studies overlap in the sense that they were able to point out the scope of reduction aversion and emphasized that it's the magnitude of losing or gain obtain that accentuates the responses of the nerves for the neuroscience and the decision to be produced by consumers for the traditional methodology. The critics from the paper has we have seen previously for the neuroscience investigation does not provide a conclusive reality as other voxels are been turned on through the process. So the activation of the meant voxels signifying damage or gain is affected with other related emotions that are discussed as inappropriate behavior strategies that cause change in consumer tendencies. And for the traditional strategy, the critics known that the guide brand can vary greatly between consumers and for that reason we cannot conclude that all consumers place their research brand predicated on lately purchased brand and for that reason we are not able to specify the degree of losing aversion to different individuals.

In summary, the gains from both study unveiled to us that there surely is a resulting aftereffect of whatever stimulus or choice been chosen by consumers and this is actually a gain or a loss and the amount or scope of benefits or loses is thought by consumers as it shows how much they hate to lose to receiving.

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