The prospect of a perfect ending: Loss aversion and the round-number biasP. Fraser-Mackenzie, M. Sung and J.E.V. Johnson Organizational Behavior and Human Decision Processes, 2015, vol. 131, issue C, 67-80 Abstract: Studies across a range of domains have shown that individuals tend to focus on round numbers as cognitive reference points; a so-called left-digit effect. We explain this effect by combining analog numerical heuristics with prospect theory in order to develop an analog value function that predicts the key characteristics of the left-digit effect. Most importantly, this value function predicts an unreported phenomenon, namely; that the left-digit effect will be more pronounced in situations involving losses (cf. gains). We confirm this prediction in both a laboratory experiment regarding hypothetical investments and analysis of buy–sell imbalances in over 15million trades by investors in a financial market. We conclude that our analog value function is a promising explanation for the left-digit effect. Furthermore, we suggest that interventions aimed at reducing costly buy–sell imbalances in financial markets should focus on the decisions made by investors when they are facing loss. Keywords: Analog value function; Round-number bias; Left-digit effect; Heuristics (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jobhdp:v:131:y:2015:i:c:p:67-80 DOI: 10.1016/j.obhdp.2015.08.004 Access Statistics for this article Organizational Behavior and Human Decision Processes is currently edited by John M. Schaubroeck More articles in Organizational Behavior and Human Decision Processes from Elsevier |
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