An important concept associated with Prospect Theory and is encapsulated in the expression “losses loom larger than gains” ( Kahneman & Tversky, 1979 ). It is thought that the pain of losing is psychologically about twice as powerful as the pleasure of gaining. People are more willing to take risks or behave dishonestly to avoid a loss than to make a gain. Loss aversion has been used to explain the endowment effect and sunk cost fallacy, and it may also play a role in the status quo bias.
Published in Chapter:
Loss Aversion in Companies Whose Location Is Affected by Fire
Mara Madaleno (GOVCOPP, University of Aveiro, Portugal), Jorge Mota (GOVCOPP, University of Aveiro, Portugal), and Fábio Brandão (University of Aveiro, Portugal)
Copyright: © 2022
|Pages: 32
DOI: 10.4018/978-1-7998-8609-9.ch007
Abstract
In Portugal, fires have originated a big debate not only because of the environmental damages they cause but also because of the material damages they provoke to families and companies. This way, it is important to understand how these events impact companies' cash holdings, not because of the direct damages caused by them, but because of managers' loss aversion. The empirical evidence, mainly documented by Dessaint and Matray and Kahneman and Tversky, were the main sources to this empirical study, where the authors have chosen to work with panel data analysis using a sample of 38,574 small and medium enterprises during the period from 2009 to 2015. About the obtained results, there is evidence that cash holdings increase when managers of a company located in a region close to a fire, but not directly damaged by it, perceive a salient event of a future fire. In other words, when they anticipate the occurrence of an identical event, cash holdings are increased to protect the company against it.