Four dot points to end the chapter

  • • Identity is a fundamental concept of modern psychology' but it hasn’t received as much attention from economists.
  • • The neoclassical model of consumer choice that we discussed in the previous chapter says that the decision-maker will substitute A for В or В for A at the same rate.
  • • Behavioural economists have found that it matters whether the person possesses A or B. If he or she possesses A or B, it is valued more and the person is less willing to accept something in exchange for it. This is the endowment effect.
  • • The endowment effect, which might be explained by loss aversion, applies to identity. The more a terrorist has worked to develop the terrorist identity, the less willingly it will be given up. This diminishes the effectiveness of incentives and deterrence and makes the terrorist more difficult to bargain with than orthodox economics would lead us to expect.


  • 1 Post (1998, p.38).
  • 2 Martin (2003, p.72).
  • 3 In fact, ‘loss aversion’ is not the term used in Kahneman and Tversky s (1079) original paper. They speak only of aversion to losses and then only once or twice. They preferred the more general statement of the concept: losses loom larger than gains. This became the definition of loss aversion in the economic literature.
  • 4 One of the most cited attempts at explaining an aspect of observed behaviour by appealing to the concept of loss aversion is Benartzi and Thalers (1995) study of the equity premium: the difference between the returns on company stocks and the returns on treasury securities on the financial markets.
  • 5 Identity is fluid to some degree and recognition that identity exhibits some (variable) degree of stability is evident in the very early literature (e.g. Marcia 1966; Markus & Kunda 1986).
  • 6 As an example, consider this statement by Crenshaw (2000, p.408): ‘Profound narcissistic disappointment... led to a terrorist identity ... Radical political action provided powerful psychological rewards, such as the acquisition of a new positive identity’. Many similar statements abound in this part of the literature.
  • 7 It seems that the terrorists were planning to execute the hostages, possibly on video stream or on television (BBC News 2015).
  • 8 In this case, perhaps against the benchmark of what they had imagined to be a successful attack.
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