Loss Aversion in the Context of Sustainability

Abstract

Aim and Research Questions Loss aversion impedes optimal investment decisions. Speaking of investments, one cannot ignore the growing importance of sustainable investing. This thesis examines the intersection of these two critical areas, a niche for which there has been little research to date. The aim is to explore how loss aversion changes in the context of sustainability in the Swiss environment. Two hypotheses guide this study: H1: For lotteries entailing a positive environmental or social factor, loss aversion is lower, and H2: Preference for sustainability is positively correlated with loss aversion. Methodology This study employed a quantitative research design. Data was collected through a structured online survey. The survey uses iterative lottery questions to measure loss aversion across three different scenarios. In the first scenario, the lottery involved plain monetary stakes. In the second scenario, an environmental impact (tree planting) was added to the gain side of the lottery. In the third scenario, a social impact (volunteer work) was incorporated in the same way. Respondents play each lottery scenario twice, once with low stakes (CHF 50) and once with high stakes (CHF 200). The survey collects the minimum gain a participant requires to accept a 50:50 lottery. Loss aversion is calculated as the gain over the loss of this marginal lottery. Additionally, social behavior is measured by capturing second player behavior in a trust game, and environmental behavior by inquiring about ten different environmental behaviors. The sample was drawn from the German-speaking Swiss population. Quotas are set for gender, age, and education. The survey collected 204 responses in total. After quality checks, 154 responses were retained for analysis. The analysis included descriptive statistics, comparative analyses, correlation analyses, and regression analyses using the statistical software R. Results and Discussion The study finds that loss aversion is statistically significantly lower in scenarios where lotteries include an environmental or social impact alongside monetary stakes. This implies that peo-ple derive additional utility from positive sustainable outcomes, which helps to mitigate their oss aversion. Interestingly, adding the social impact lowers loss aversion more than adding the environmental impact. This suggests that respondents may prioritize social issues over envi-ronmental ones or perceive the magnitude of the social impact as greater. Additionally, loss aversion increases with larger stakes. Specifically, participants display higher loss aversion when the potential loss is CHF 200 compared to CHF 50. In terms of personal characteristics, social behavior shows a small but robust negative correlation with loss aversion. This suggests that individuals who are more socially inclined tend to exhibit slightly lower loss aversion. The result is not statistically significant in the high-stake lottery. In fact, personal characteristics are found to have less explanatory power in the high-stake scenario. Still the results show that women exhibit higher loss aversion compared to men. Additionally, older age groups and lower income levels are associated with higher loss aversion. Education and financial literacy show no significant impact on loss aversion. Despite signs of a potential positive correlation, environmental behavior cannot reliably be correlated with loss aversion. This could be due to measurement issues. Limitations The analysis was challenged by two main limitations of the research design. First, the survey was designed to only measure the loss aversion coefficient between the values of 1 and 3. This appears to be insufficient, as a substantial number of observations exceed this measurement scale. The issue was addressed by imputing the missing values with the next highest value and applying mean- and rank-based statistical methods. Second, factor analysis of the environmental questions shows that these do not reliably capture environmental behavior. Therefore, results for environmental behavior raise validity concerns. Implications and Conclusion Overall, this study provides insights into how sustainability aspects and loss aversion interact. The results show that environmental and social factors might be able to lessen the bad effects of loss aversion in investing by giving people more non-financial utility. Therefore, loss averse investors are advised to add sustainable investments to their portfolios and focus on the positive environmental and societal impacts these generate. Further research with improved measure-ment tools and a larger sample is recommended to confirm and expand on the findings of this thesis.