Lay Theories Of Investment And Gambling And Their Relations To Loss Aversion

People show domain-specific risk preferences in different domains.Risk involves five domains,including financial,health/safety,recreational,ethics,and social domains.The financial domain can be further divided into investment and gambling domains.Gambling shares similarities with investment.How do laypeople perceive investment and gambling? The present research explores the lay theories of investment and gambling,and how these lay theories affect loss aversion in investment and gambling domains.It is hypothesized that(1)people believe investment is associated with gains,whereas gambling is associated with losses;and(2)loss aversion is stronger in the gambling domain than in the investment domain.Study 1 investigated the lay theories of investment and gambling domain.Results showed an association between investment and gains and an association between gambling and losses.Next four studies investigated how these lay theories affect loss aversion in the investment and gambling domains.In Study 2,loss aversion was captured by the amount of gains participants were willing to accept for the given amount of losses.In Study 3,loss aversion was captured by the amount of losses participants were willing to accept for the given amount of gains.In Study 4,we test if loss aversion differed in the stock and lottery to rule out the confounding role of morality in investment and gambling task.In Study 5,participants made real decisions in an incentivized setting and their loss aversion in investment and gambling was assessed.Overall,results showed that(1)laypeople associate investment with gains but associate gambling with losses;and(2)loss aversion was stronger in the gambling domain than in the investment domain.The present research reveals that lay theory of investment differed from lay theory of gambling,and these lay theories influence loss aversion in the investment and gambling domains.People obtain more information about loss in the gambling domain than in the investment domain.Based on the availability heuristic,people are more sensitive to losses in the gambling domain than in the investment domain.Thus,loss aversion was stronger in the gambling domain than in the investment domain.On the one hand,these findings contribute to the theories of domain-specific risk preferences.On the other hand,they show the domain-framed loss aversion.This research also carries important implications for financial market.