Thinking like a trader selectively reduces individuals' loss aversion

Abstract

Research on emotion regulation has focused upon observers' ability to regulate their emotional reaction to stimuli such as affective pictures, but many other aspects of our affective experience are also potentially amenable to intentional cognitive regulation. In the domain of decision-making, recent work has demonstrated a role for emotions in choice, although such work has generally remained agnostic about the specific role of emotion. Combining psychologically-derived cognitive strategies, physiological measurements of arousal, and an economic model of behavior, this study examined changes in choices (specifically, loss aversion) and physiological correlates of behavior as the result of an intentional cognitive regulation strategy. Participants were on average more aroused per dollar to losses relative to gains, as measured with skin conductance response, and the difference in arousal to losses versus gains correlated with behavioral loss aversion across subjects. These results suggest a specific role for arousal responses in loss aversion. Most importantly, the intentional cognitive regulation strategy, which emphasized "perspective-taking," uniquely reduced both behavioral loss aversion and arousal to losses relative to gains, largely by influencing arousal to losses. Our results confirm previous research demonstrating loss aversion while providing new evidence characterizing individual differences and arousal correlates and illustrating the effectiveness of intentional regulation strategies in reducing loss aversion both behaviorally and physiologically.

Fig. 1.

Individual loss aversion coefficients (λ) when using the Attend strategy in Study 1. Green indicates λ < 1 (gain seeking), blue indicates λ is not different from 1 (gain-loss neutral), and red indicates λ > 1 (loss averse). Error bars are standard error of the mean.

Fig. 2.

Percent change in loss aversion due to the cognitive strategy in Study 1, expressed as (λ_Regulate − λ_Attend) as percent of λ_Attend. A negative value indicates less loss aversion during Regulate trials. Participants are in the same order as Fig. 1. Changes in loss aversion exceeding the 0.05 criterion cutoff are marked with red asterisks.

Fig. 3.

Average Loss − Gain ($\sqrt{\mu S}$/$) SCR difference scores from Study 2. (A) Across all subjects, arousal is greater per dollar to losses than gains, but only in the Attend condition. (B) Regulators (exceeded cutoff for decrease in λ) show a significant decrease in the difference score, while Nonregulators (did not exceed cutoff for decrease in λ) do not. Error bars are standard error of the mean.

Fig. 4.

Individuals' physiological SCR difference score Loss − Gain ($\sqrt{\mu S}$/$) plotted against their behavioral loss aversion coefficient λ in the Attend condition in Study 2. Removal of candidate outliers strengthens the correlation.