Disappointment aversion has been suggested as an explanation for non-truthful rankings in strategy-proof school-choice matching mechanisms. We test this hypothesis using a novel experimental design that eliminates important alternative causes of non-truthful rankings. The design uses a simple contingent choice task with only two possible outcomes. Between two treatments, we manipulate the possibility for disappointment aversion to have an effect on ranking. We find a small and statistically marginally significant treatment effect in the direction predicted by disappointment aversion. We therefore conclude that disappointment aversion is a minor contributor to non-truthful rankings in strategy-proof school-choice matching mechanisms.

We investigate the role of visual attention in risky choice in a rich experimental dataset that includes eye-tracking data. We first show that attention is not reducible to individual and contextual variables, which explain only 20% of attentional variation. We then decompose attentional variation into individual average attention and trial-wise deviations of attention to capture different cognitive processes. Individual average attention varies by individual, and can proxy for individual preferences or goals (as in models of “rational inattention” or goal-directed attention). Trial-wise deviations of attention vary within subjects and depend on contextual factors (as in models of “salience” or stimulus-driven attention). We find that both types of attention predict behavior: average individual attention patterns are correlated with individual levels of loss aversion and capture part of this individual heterogeneity. Adding trial-wise deviations of attention further improves model fit. Our results show that a decomposition of attention into individual average attention and trial-wise deviations of attention can capture separable cognitive components of decision making and provides a useful tool for economists and researchers from related fields interested in decision-making and attention.

Simulating a real world environment is of utmost importance for achieving accurate and meaningful results in experimental economics. Offering monetary incentives is a common method of creating this environment. In general, experimenters provide the rewards at the time of experiment. In this paper, we argue that receiving the reward at the time of the experiment may lead participants to make decisions as if the money they are using were not their own. To solve this problem, we devised a “prepaid mechanism” that encourages participants to use the money as if it were their own.

We use different incentive schemes to study truth-telling in a die-roll task when people are asked to reveal the number rolled privately. We find no significant evidence of cheating when there are no financial incentives associated with the reports, but do find evidence of such when the reports determine financial gains or losses (in different treatments). We find no evidence of loss aversion in the standard case in which subjects receive their earnings in a sealed envelope at the end of the session. When subjects manipulate the possible earnings, we find evidence of less cheating, particularly in the loss setting; in fact, there is no significant difference in behavior between the non-incentivized case and the loss setting with money manipulation. We interpret our findings in terms of the moral cost of cheating and differences in the perceived trust and beliefs in the gain and the loss frames.

We study the impact of endowments and expectations on reference point formation and measure the value of food safety certification in the context of fish trading on real markets in Nigeria. In our field experiment, consumers can trade a known food item for a novel food item that is superior in terms of food safety––or vice versa. Endowments matter for reference point formation, but we also document a reverse endowment effect for a subsample of respondents. The effect of expectations about future ownership is weak and mixed. While expectations seem to affect bidding behavior for subjects “trading up” to obtain the certified food product (a marginally significant effect), it does not affect bids for subjects “trading down” to give up this novel food item. Finally, willingness to pay for safety certified food is large for our respondents—our estimate of the premium is bounded between 37 and 53% of the price of conventional, uncertified food.

Does loss aversion apply to social image concerns? In a laboratory experiment, we first induce social image in a relevant domain, intelligence, through public ranking. In a second stage, subjects experience a change in rank and are offered scope for lying to improve their final, also publicly reported rank. Subjects who care about social image and experience a decline in rank lie more than those experiencing gains. Moreover, we document a discontinuity in lying behavior when moving from rank losses to gains. Our results are in line with loss aversion in social image concerns.

The compromise effect arises when being close to the “middle” of a choice set makes an option more appealing. The compromise effect poses conceptual and practical problems for economic research: by influencing choices, it can bias researchers’ inferences about preference parameters. To study this bias, we conduct an experiment with 550 participants who made choices over lotteries from multiple price lists (MPLs). Following prior work, we manipulate the compromise effect to influence choices by varying the middle options of each MPL. We then estimate risk preferences using a discrete-choice model without a compromise effect embedded in the model. As anticipated, the resulting risk preference parameter estimates are not robust, changing as the compromise effect is manipulated. To disentangle risk preference parameters from the compromise effect and to measure the strength of the compromise effect, we augment our discrete-choice model with additional parameters that represent a rising penalty for expressing an indifference point further from the middle of the ordered MPL. Using this method, we estimate an economically significant magnitude for the compromise effect and generate robust estimates of risk preference parameters that are no longer sensitive to compromise-effect manipulations.

Individuals were found to anonymously predict positive election outcomes for their preferred candidate. Yet, there is little scientific knowledge about election predictions made in the context of same-camp political communications (i.e., partisan communications) that are presumably meant to encourage other supporters. In five studies of low-information elections and a study of hypothetical U.S. elections (n = 1889), we found that people tended to communicate favorable forecasts to others sharing their view, compared to the neutral point and to the actual election outcomes. On the other hand, negative framing reduced the positivity of forecasts in these communications to the extent that it led most participants to predict an election loss. This occurred in response to a single addressee acting discordantly and even more strongly when the election results were phrased as a drop. When both positive and negative framing options were available, this still negativity affected participants’ predictions even though only a minority selected the negative framing option. Thus, people tend to make optimistic election predictions in partisan communications, but this pattern is easily manipulable given subtle changes in the forecasting prompt, either by negative framing or selectable positive and negative framing.

Strictly proper scoring rules are designed to truthfully elicit subjective probabilistic beliefs from risk neutral agents. Previous experimental studies have identified two problems with this method: (i) risk aversion causes agents to bias their reports toward the probability of $1/2$$1/2$, and (ii) for moderate beliefs agents simply report $1/2$$1/2$. Applying a prospect theory model of risk preferences, we show that loss aversion can explain both of these behavioral phenomena. Using the insights of this model, we develop a simple off-the-shelf probability assessment mechanism that encourages loss-averse agents to report true beliefs. In an experiment, we demonstrate the effectiveness of this modification in both eliminating uninformative reports and eliciting true probabilistic beliefs.

We seek to isolate in the laboratory factors that encourage and discourage the sunk cost fallacy. Subjects play a computer game in which they decide whether to keep digging for treasure on an island or to sink a cost (which will turn out to be either high or low) to move to another island. The research hypothesis is that subjects will stay longer on islands that were more costly to find. Eleven treatment variables are considered, e.g. alternative visual displays, whether the treasure value of an island is shown on arrival or discovered by trial and error, and alternative parameters for sunk costs. The data reveal a surprisingly small sunk cost effect that is generally insensitive to the proposed psychological drivers.

Firms face an optimization problem that requires a maximal quantity output given a quality constraint. But how do firms incentivize quantity and quality to meet these dual goals, and what role do behavioral factors, such as loss aversion, play in the tradeoffs workers face? We address these questions with a theoretical model and an experiment in which participants are paid for both quantity and quality of a real effort task. Consistent with basic economic theory, higher quality incentives encourage participants to shift their attention from quantity to quality. However, we also find that loss averse participants shift their attention from quality to quantity to a greater degree when quality is weakly incentivized. These results can inform managers of appropriate ways to structure contracts, and suggest benefits to personalizing contracts based on individual behavioral characteristics.

Consumer preferences are often influenced by reference-dependent preferences. This study investigates the influence of reference-dependent preferences on the estimation of willingness to pay (WTP) for table grape attributes elicited by a second-price auction. We evaluate two models: the attribute-based reference dependence model, where individuals compare the target product’s attributes with their favorite ones, and the alternative-based reference dependence model, where comparisons are made with a reference product. Results show that including reference points impacts the WTP estimation for different attributes, with varying levels of loss aversion, suggesting the attribute-specific influence of reference points.

How does the mass public form attitudes on electoral rules and reforms? Existing research on this question reveals a trade-off between principles, such as fairness, and partisan self-interest. I use two survey experiments on state legislative redistricting to explore how voters weigh principles against partisan self-interest when forming opinions on electoral reforms. First, I ask whether the public’s partisan self-interest motivation stems more from individual representation considerations or broader partisan power considerations. I find that both considerations provide a powerful enough incentive to activate partisan self-interest regarding preferences for state legislative district maps. Unexpectedly, the two considerations have quite similar effects on public support for redistricting reforms. Second, I explore the principles versus partisan self-interest trade-off through the lens of loss aversion, a concept developed in behavioral economics. In line with expectations, I find that preventing loss provides a more powerful incentive for Americans to violate democratic principles than achieving partisan gain. In sum, this research sheds light on voters’ decision between principles and partisan self-interest in the formation of opinion on electoral reform.

Households are frequently subject to income and asset shocks. We performed a lab experiment, inducing losses on a real effort task, after which we measured cognitive performance, loss aversion and cheating behavior. We found that asset losses, but not income losses, act as a cognitive load, by decreasing accuracy and increasing response times. We did not detect any change in dishonesty or loss aversion.

The literature on rent-seeking primarily focuses on contests for achieving gains, although contests for avoiding losses are also omnipresent. Examples for such ‘reverse’ contests are activities to prevent the close-down of a local school or the construction of a waste disposal close-by. While under standard preferences, investments in ‘reverse’ and ‘conventional’ contests should not be different, loss aversion predicts contests for avoiding losses to be fiercer than conventional ones. In our experimental data, the difference in investments between conventional and reverse Tullock contests is small and statistically insignificant. We discuss several explanations for this remarkable finding.

It has been observed that, in a variety of tasks, losses have a larger impact on behavior than do gains of equal size. This phenomenon is referred to as loss aversion. It is thought that the negativity bias in behavior is reflected in and potentially causally related to a negativity bias in emotional arousal. We examine skin conductance responses—a psychophysiological marker for emotional arousal—during the anticipation of gains and losses. In contrast to most previous research, gains and losses were separated from each other and symmetric in magnitude. We found that skin conductance responses during the anticipation phase increased with the magnitude of both gains and losses. Contrary to the predictions of the loss aversion hypothesis, the anticipation of a loss did not elicit stronger reactions than the anticipation of a gain of equal size.

This paper studies individuals’ preference for reducing advantageous inequality in the distribution of gains and losses. Combining the inequality aversion model of Fehr and Schmidt (Q J Econ 114(3):817–868, 1999) with loss aversion à la Kahneman and Tversky (Econom J Econom Soc:263–291, 1979), we predict the relative dislike for advantageous inequality is lower when outcomes are framed as losses than when outcomes are framed as gains. We test this prediction using data from two modified dictator game experiments. Consistent with the model, we find that the amount of payoff that subjects are willing to sacrifice to increase the net payoff of others and reduce advantageous inequality is smaller under a loss frame than under a gain frame. The results also show that women are more inequality averse than men in both gains and losses.

We study the relative effectiveness of contracts that are framed either in terms of bonuses or penalties. In one set of treatments, subjects know at the time of effort provision whether they have achieved the bonus/avoided the penalty. In another set of treatments, subjects only learn the success of their performance at the end of the task. We fail to observe a contract framing effect in either condition: effort provision is statistically indistinguishable under bonus and penalty contracts.