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This paper examines the predictions of expectations-based reference-dependent models for risk-apportionment tasks that elicit higher-order risk attitudes. We consider some of the most commonly used specifications of Kőszegi and Rabin (2006, 2007) and disappointment aversion models. Our analysis reveals that higher order risky choices exhibited by decision makers defined by those model specifications depend on whether risks to be apportioned in these tasks are symmetric or asymmetric, whether they include small probability outcomes, and on the level of loss aversion. We highlight that some of the predicted choice behaviour in the risk-apportionment tasks differs from the ones in alternative models of decision under risk. We employ experimental data to examine whether choice patterns in the risk apportionment tasks are in line with the predictions of the model specifications described here. We find that only a small proportion of them are consistent with those predictions. [ABSTRACT FROM AUTHOR]

The status-quo bias (SQB) is the tendency to stick with the current situation despite potential dissatisfaction. In this study, we explore the relationship between SQB and subjective well-being (SWB). We hypothesized that higher SQB may lead to less desirable situations (e.g., unsatisfactory marriage, unwanted job), negatively affecting SWB. We developed and examined a novel index for measuring SQB. Surveying 1,423 Israeli working adults, the index showed strong internal consistency and validity, affirming reliability and construct validity. A significant negative correlation between SQB and three SWB measures was found, with SQB explaining more to SWB variations than subjective health, income, and religion combined. Positive life changes over the past three years have moderated this relationship. Moreover, despite including factors like regret, present bias, loss aversion, and optimism—which correlate with SWB and SQB in opposite directions and, therefore, could nullify our findings—the SQB-SWB correlation remained robust. Furthermore, our SQB measure significantly predicted SWB even when controlling for the negative relationship between the affective component of SWB (i.e., emotions) and SQB, which was demonstrated to operate in reverse causality compared to our hypothesis. In other words, SQB was found to mediate between the affective component and the other components of SWB. By providing evidence of the correlation between SQB and SWB, we introduce a robust SQB measurement tool, and underscore SQB's importance when exploring SWB determinants, suggesting that policy interventions encouraging individuals to overcome barriers to change could be advantageous. [ABSTRACT FROM AUTHOR]

We investigate the optimal design of incentives when agents exhibit reference dependence. The theoretical framework of this paper incorporates the most prominent accounts of reference-dependent preferences and the most frequently used reference point rules. Such a general treatment of preferences allows us to characterize sufficient conditions on preference for the optimality of bonuses. We find that the optimal contract must include a bonus when agents suffer from loss aversion or exhibit sufficiently strong diminishing sensitivity. Moreover, we show that such a result holds when the reference point is either exogenous or deterministic. This paper provides a rationale for incentive schemes including bonuses grounded in preference. [ABSTRACT FROM AUTHOR]

• Expected utility theory is not appropriate for understanding the behavior of low-income farmers. • Lexicographic ordering has the advantages of procedural rationality and the behavioral focus on thresholds. • Lexicographic ordering is readily adaptable to the narrative that low income farmers put safety first. • Focusing on safety does not imply avoidance of variance-increasing techniques. As Richard Day explained, expected utility theory suffers from procedural irrationality. This and other problems are illustrated here in the context of decision-making among low-income farmers. Farmers in developing countries are commonly thought to underinvest in modern techniques because their low incomes make them especially risk averse. In addition to the procedural leap of faith, highly restrictive assumptions are needed to apply expected utility theory to the problem. Nor does expected utility theory, as usually prescribed, fit the narrative of loss aversion. The reader is introduced to a procedurally rational substitute called lexicographic safety first. The model is illustrated for the case of rice fertilization in the Philippines, and policy implications are drawn. To illustrate the potential appeal of lexicographic ordering for other applications involving thresholds, a lexicographic model of rational addiction is also provided. [ABSTRACT FROM AUTHOR]

We present novel evidence from a large panel of UK consumers who receive personalized reminders from a specialist price-comparison website about the precise amount they could save by switching to their best-suited alternative mobile telephony plan. We document three phenomena. First, even self-registered consumers with positive savings exhibit inertia. Second, we show that being informed about potential savings has a positive and significant effect on switching. Third, controlling for savings, the effect of incurring overage payments is significant and similar in magnitude to the effect of savings: paying an amount that exceeds the recurrent monthly fee weighs more on the switching decision than being informed that one can save that same amount by switching to a less inclusive plan. We interpret this asymmetric reaction on switching behavior as potential evidence of loss aversion. In other words, when facing complex and recurrent tariff plan choices, consumers care about savings but also seem to be willing to pay upfront fees in order to get "peace of mind". [ABSTRACT FROM AUTHOR]

• We test models combining social and risk preferences. • We test whether agents are socially curious. • Competitive preferences best explain social risk taking. • They can explain social curiosity. We present an experiment providing (a) a horse race among different models combining social preferences and risk preferences, and (b) a test of whether agents are socially curious, that is wanting to know about the risk taking of others and the outcomes of their risk taking. We distinguish outcome driven models (that is, models where agents care about the earning outcomes for themselves and others) from action driven models (that is, models where agents care about one's risk taking actions relative to the actions of others). We embed outcome and action driven competitive preferences, inequality aversion, conformism, and social loss aversion, within a single theoretical framework generalized from Bolton and Ockenfels (2000). We find that competitive preferences models best explain investment decisions in our setting, with almost 50% of subjects influenced both by their co-participants' actions and outcomes. Social information is sought 90% of the times when it is free. When it is costly, it is sought 30% of the times if the information is instrumental for one's own investment decision and 10% to 20% of the times if it is not. Competitive preferences can help explain social curiosity. [ABSTRACT FROM AUTHOR]

Under standard assumptions, costly voting models predict that the supporters of the underdog –i.e., of the candidate that is expected to lose– are less likely to abstain than the supporters of the expected winner (Palfrey and Rosenthal, 1985; Herrera et al., 2014). While some empirical/experimental studies identify this underdog effect (Levine and Palfrey, 2007), in others bandwagons emerge: the supporters of the expected winner are found to abstain less often than the supporters of the underdog (Agranov et al., 2018). We focus on large elections and follow Kőszegi and Rabin(2006, 2007) by considering that voters experience losses, with respect to their expected equilibrium payoffs, more intensely than gains. When the election is sufficiently close (i.e., when the shares of the supporters of the two alternatives are not too asymmetric), we find that bandwagons emerge in every equilibrium. To our knowledge, this is the first formal study that explains bandwagons in large elections, by incorporating a commonly accepted behavioural model in an otherwise standard context of costly voting. [ABSTRACT FROM AUTHOR]

• Contributions to tax-deductible savings plans are used to manipulate tax refunds. • Some evidence this behavior is driven by tax filers with low financial literacy. • Contributions are lumpy, occurring disproportionately at the end of the tax year. • Findings are consistent with loss aversion. Using administrative data from Canada linked to a financial capability survey, I show that tax-deductible savings plans are often used to manipulate final balances owed to the central tax authority during tax season. This finding implies a strong avoidance motive for saving, where tax filers manipulate final balances rather than total tax liabilities, consistent with loss-aversion. The magnitude of this effect is economically significant. For example, each $100 owed increases the likelihood of contributing by about half a percentage point. There is suggestive evidence that the behavior is driven by tax filers with low financial literacy who make disproportionately large contributions in the last 60 days before the annual deadline. [ABSTRACT FROM AUTHOR]

Demand is frequently found to react differently to price increases than to price decreases. This finding is usually attributed to psychological phenomena such as loss aversion or to the different pace with which price changes become known to potential buyers leading to a kinked demand curve. This kink is often invoked in explaining why prices are sticky, especially in the downward direction. We analyse the presence of and the causes for asymmetric price elasticities of demand for the London Underground. Studying public transport demand offers unique advantages: the service cannot be stored and must be consumed at the point of purchase, and the consumption of public transport cannot be preponed or postponed. During the period that we study some nominal fares on the network have increased while others have decreased, offering a unique opportunity to observe price elasticities for both cases. Comparing changes in price elasticities after a price decrease to changes after a price increase, we find that demand is more sensitive to price increases than to decreases (by 0.5 to 1.0 percentage points). We also find that loss aversion contributes to this asymmetry at least on the intensive margin of transport demand. [ABSTRACT FROM AUTHOR]

Gender differences in decision making is a topic that has attracted much attention in the literature and the debate seems to be inconclusive. A method that is often used in the economics literature to account for gender effects is by estimating econometric structural models and testing the significance of the estimated parameters. In this paper we focus on estimations of preference models and we show how omitting to account for behavioural heterogeneity can lead to failures in identifying potential differences. Using data from risky choice experiments, we compare the traditional representative agent Maximum Likelihood Estimation approach against two more flexible inference methods that allow for heterogeneity at the individual level, the Maximum Simulated Likelihood Estimation, and the Hierarchical Bayesian modelling. We show how ignoring heterogeneity may lead to failures capturing gender differences and we suggest the use of Bayesian modelling to effectively estimate the underlying parameters. [ABSTRACT FROM AUTHOR]

• Communism and the following transition processes affect risk and time preferences. • Deeply rooted cultural differences may influence loss aversion and patience. • Frameworks of prospect theory and quasi-hyperbolic discounting are applied. • Data from two large-scale surveys, INTRA and SOEP, are investigated. Even three decades after the end of communism in Eastern Europe, there are still observable differences in financial risk and time preferences compared to Western Europe. Using data from two large-scale surveys – one including European countries (INTRA) and one for West and East Germany (SOEP) – we show that the causes of these differences are not the same: While differences in loss aversion and patience are most likely caused by deeply rooted cultural differences that date back even before communist times, other differences can be explained by experiences during the communist era and the transition processes that followed. These insights may also help to predict what differences are more likely to converge in the near future. [Display omitted] [ABSTRACT FROM AUTHOR]

Index insurance offers an innovative risk management solution for uninsured agricultural weather risk. We investigate the theoretical relationship between prospect theory risk preferences and characteristics of index insurance. We pair these theoretical findings with data from a lab-in-the-field experiment in Kenya. Empirically, we find that insurance demand is decreasing in loss aversion, and the negative marginal effect of loss aversion on insurance demand increases with basis risk and the insurance premium. Our theoretical and empirical results combined illustrate the importance of considering both risk and loss aversion, as well as basis risk, in understanding index insurance decisions. [ABSTRACT FROM AUTHOR]

• We design an experiment with real incentives to investigate the sunk cost bias and potential psychological mechanisms explaining it. • We observe a robust reverse sunk cost effect: the larger an initial investment into a project, the lower the likelihood to continue investing. • The reverse sunk cost effect in the incentivized task is also shown by participants who show a standard sunk cost bias in survey measures. We experimentally investigate the effect of sunk cost in a two-stage investment continuation task. After an initial investment, participants have to decide whether or not to continue the project with an additional investment. We do not find a standard sunk cost bias, but observe a robust reverse sunk cost effect: the larger the initial investment, the lower the likelihood to continue investing. This holds despite the fact that we replicate the standard sunk cost bias in hypothetical scenarios. We argue that both, risk aversion without asset integration and loss aversion can account for the reverse sunk cost effect. [ABSTRACT FROM AUTHOR]

A fundamental tenet of economics is that agents respond to incentives. When filing their tax returns, Swedish taxpayers get information about whether they are below or above a salient tax kink, information that could affect tax-filing behavior. Ceteris paribus, rational taxpayers would be more likely to claim deductions when facing a higher marginal tax rate. They also get informed whether they can expect a tax refund or have taxes due. This information would be of no importance to rational individuals, but a loss averse taxpayer would be more likely to claim deductions if having taxes due than if expecting a refund. We study the probability of claiming deductions in an RDK framework using register data on the universe of Swedish taxpayers over an eight-year period. We find a strong causal effect of taxes due, while the response to the marginal tax kink is insignificant. The results are similar for inexperienced (young) and experienced (old) taxpayers. Hence, loss aversion is much more decisive than standard economic incentives in predicting deduction behavior. [ABSTRACT FROM AUTHOR]

We introduce a training intervention based on a novel tool to mitigate behavior consistent with myopic loss aversion (MLA). We present the results of a large-scale online experiment with 894 student participants. The study featured a two-step debiasing training intervention based on experience sampling and a subsequent elicitation of MLA. We found that participants in the baseline treatment exhibit behavior consistent with MLA, which was not the case for decision makers who underwent the debiasing training intervention. Nonetheless, we found no statistically significant difference-in-difference effect of the training intervention on the magnitude of MLA. However, when we focused on the more attentive participants, the magnitude of the difference-in-difference effect of the training intervention increased strongly and became statistically significant when controlling for age, gender, education, field of study, investment experience, and risk preferences. [ABSTRACT FROM AUTHOR]

We measure the marginal effects of two crucial dimensions of the Investment Game design of Gneezy and Potters (1997, GP97) and its replications: time frequency and time horizon. To this aim, we randomize between subjects five different time frequencies: 1 round ("High Frequency" in GP97), 3 rounds ("Low Frequency"), but also 6, 9 and 12 rounds. As for time horizon, we compare the baseline GP97 horizon (9 rounds) with smaller (3 and 6 rounds), but also higher (12 rounds) alternatives. We find that, holding the time horizon constant, subjects invest more when they evaluate their investments less frequently, but this result is significant only when time horizon is sufficiently long. We also find that lower frequencies increase the marginal investment at a decreasing rate. As for time horizon, we find that, holding time frequency constant, the higher the horizon, the lower the investment (although, as in the previous case, investment lowers at a decreasing rate). Our reduced form results also show that subjects' behavior is sensitive to the endowment stock provided along the experiment, independently of time frequency. [ABSTRACT FROM AUTHOR]

We study how a gift exchange labor market reacts to the occurrence of negative shocks. One-round shocks may hit either workers' wages or employers' earnings (via worker productivity). In our model, other-regarding preferences suffice to predict gift exchange and wages above the competitive level. Wage rigidity is predicted if we add wage illusion and loss aversion. Using a real-effort laboratory experiment, we find support for the model. When there are no shocks, there is gift exchange. After a wage shock we see strong nominal wage rigidity and no impact on workers' effort, as predicted. Rigidity is also observed after a productivity shock, but here we do observe increases in effort, especially at low wages. The latter is contrary to the model predictions and suggests that productivity shocks alter gift-exchange patterns. We conclude that the wage rigidity often observed in the field can be explained by boundedly rational workers with social preferences. [ABSTRACT FROM AUTHOR]

• When observed by peers 18–24-year-olds take more financial risk in gains and losses. • When observed by peers 18–24-year-olds are more loss averse. • Results are much stronger using between- than within-subject analysis. • 12–17-year-olds' decisions were not affected by peer observation. Relative to adults, adolescents make more welfare-decreasing decisions, especially in the presence of peers. The consequences of these decisions result in substantial individual and societal losses in terms of lives lost, injury, hospitalization costs, and foregone opportunities. In this paper, we use laboratory within-subject and between-subject experiments with younger (12–17 years old) and older (18–24 years old) adolescents to identify which economic preference is affected by peer observation in adolescence — risk tolerance in gains, risk tolerance in losses, and/or loss aversion. We find that in our study, while observed by peers, 18–24-year-old adolescents became more risk-tolerant both in gains and in losses but more loss averse. We discuss the potential mechanisms driving the result and its policy implications. [ABSTRACT FROM AUTHOR]

Incomplete contracts are the rule rather than the exception, and any incentive scheme faces the risk of improving performance on incented aspects of a task at the detriment of performance on non-incented aspects. Recent research documents the effect of loss-framed versus gain-framed incentives on incentivized behavior, but how do such incentives affect overall performance? We explore potential trade-offs by conducting field experiments in an artificial "workplace". We explore two types of incentive spillovers: those contemporaneous to the incented task and those subsequent to the incented task. We report three main results. First, consonant with the extant literature, a loss aversion incentive induces greater effort on the incented task. Second, offsetting this productivity gain, we find that the quality of work decreases if quality is not specified in the incentive contract. Third, we find no evidence of harmful spillover effects to subsequent tasks; if anything, the loss aversion incentive induces more effort in subsequent tasks. Taken together, our results highlight that measuring and accounting for incentive spillovers are important when considering their overall impact. [ABSTRACT FROM AUTHOR]

We consider the long-run outcomes of bargaining games when players obey prospect theory. We extend the evolutionary bargaining model of Young (1993) to a two-stage Nash demand game. Two players simultaneously choose whether to exercise an outside option in the first stage and play the Nash demand game in the second stage, which will be reached only if neither player exercises the outside option. We address the influence on the stochastically stable division of reference-dependent preferences where the reference point is the value of the outside option. We show that the division consistently differs from the Nash bargaining solution under expected utility theory. Inspired by this, we propose a prospect theory Nash bargaining solution , which coincides with the stochastically stable division. [ABSTRACT FROM AUTHOR]

Default options may provide a low-cost way of influencing behaviour without modifying incentives and constraining choices between alternatives. However, an improved understanding is needed on whether they are effective when individuals have experience with making the choice in practice and have preferences for specific alternatives. We study whether defaults can be used to increase insurance coverage against low-probability/high-impact risks, like floods, and whether past flood insurance purchases and flooding experience moderate the effect of defaults. Our study uses a naturally occurring difference in experience, comparing the surveyed flood insurance choices of 1,187 homeowners, half of whom are in the Netherlands, where flood insurance penetration rates are low and recent flooding caused minor losses, and the other half of whom are in the United Kingdom (UK), where the opposite is true. We find defaults are effective amongst homeowners with little to no flood-related experience: in the Netherlands defaults increase the likelihood of insuring by between 17 and 18 percentage points. Although there is no overall effect of defaults in the UK, defaults increase flood insurance coverage for risk averse individuals, and those who have no reported previous flood experience and have not purchased flood insurance. Anticipated regret about not having insurance coverage in the event of a flood, and perceptions about the insurance cost explain between 34 and 37 percent of the relationship between the default and flood insurance demand. We discuss policy implications of our findings. [ABSTRACT FROM AUTHOR]

In this paper, we study insurance decisions when the policyholder evaluates insurance with narrow framing. We show that due to aversion to risk on the net insurance payoff, i.e., insurance indemnity minus insurance premium, narrow framing reduces insurance demand. This helps explaining the observed low insurance demand in many insurance markets. We also show that the optimal insurance contract involves a deductible and the coinsurance of losses above the deductible when transaction costs depend on the actuarial value of the policy. Moreover, when the policyholder is loss averse over the net insurance payoff, a fixed indemnity equal to insurance premium should be paid for a range of intermediate losses. [ABSTRACT FROM AUTHOR]

• There is evidence that consumer do not react symmetrically to price rises and cuts. • Ignoring asymmetric price elasticities may lead to biases when simulating fiscal measures. • We specify a discrete choice model and an EASI demand system with reference prices. • Using home scan data, we find evidence of asymmetric elasticities in soft drink demand. • Ignoring loss aversion may bias simulation of fiscal measures, especially subsidies. Canonical demand studies and fiscal policy simulations rest on the assumption that consumers react symmetrically to price increases and decreases. Such assumption has been challenged from both the empirical and theoretical points of view. We propose theoretically consistent empirical specifications to estimate discrete choice models (random utility DCM) and continuous demand systems (EASI and AIDS demand systems) that allow for reference prices and asymmetric own- and cross-price demand response. Our application focuses on the demand for sugar-sweetened beverages in Great Britain, using transaction-level household purchase data and different product aggregation levels. We find substantial evidence of asymmetric consumer response and loss aversion, with a stronger response when prices rise above their reference level. Our results hold for both DCMs on highly differentiated products and demand systems on aggregate product categories, and are robust to alternative model and reference price specifications. Simulations of taxes and subsidies on soft drinks shows that ignoring asymmetry may lead to biases, especially when predicting price cuts. [ABSTRACT FROM AUTHOR]

Recent developments in research on insurance reveal a shift towards behavioral insurance. Decisions remain rational but in a broader framework of reference that accounts for the role of loss aversion, ambiguity, framing, reference points, and emotions in people's decisions. In this special issue, many of those points are discussed in connection with the demand for insurance. Some of the major insurance puzzles, such as insufficient demand for coverage, the crowding-out effect between insurance mechanisms, and the opportunism in the insurance market that arises from asymmetric information are covered. This paper introduces 24 texts on behavioral insurance. [ABSTRACT FROM AUTHOR]

This work analyzes if reference dependence and loss aversion can explain the puzzling low adoption rates of rainfall index insurance. We present a model that predicts the impact of loss aversion on index insurance demand to vary with different levels of insurance understanding. Index insurance demand of farmers who are unaware of the loss-hedging benefit that insurance provides decreases with loss aversion. In contrast, insurance demand of farmers who are aware of the loss-hedging benefit increases with loss aversion. The model further predicts that farmers who are unaware of the loss-hedging benefit will not demand an even highly subsidized index insurance. Using data from a randomized controlled trial involving a sample of Indian farmers we provide empirical support for our core conjecture that insurance understanding mitigates the negative impact of loss aversion on index insurance adoption. [ABSTRACT FROM AUTHOR]

• Most farmers reveal risk and loss aversion regarding technology uptake. • Risk aversion lowers insured technology adoption while loss aversion enhances uptake of insured technology options. • Poorer farmers under-invest in insured loan options. • Index insurance does't sufficiently counter the poverty constraints and risk preferences that inhibit farm technology uptake. • Cumulative experimental income and being above the median group real income level lead to higher insured credit uptake. We use a series of framed experimental games to test the role of access to credit and insurance on farm technology uptake with small-scale farmers in South Africa. Using Cumulative Prospect Theory 'CPT', we assess how insurance impacts technology uptake given risk preferences. Our findings suggest that risk aversion is linked to lower uptake of the uninsured and insured technology, while loss averse farmers are more likely to adopt technology bundled with insurance. In line with literature on poverty traps we further find that wealth is critical in uptake of technology, with cumulative experimental income and being below the mean income in terms of real-life income stifling investment in insured and uninsured technology options. Overall, we find that insurance is not sufficient to counter the behavioural factors linked to asset constraints and risk preferences that suppress modern farm technology uptake. [ABSTRACT FROM AUTHOR]

This paper develops a model of insurance choice and derives the implications for insurance plan selection when consumers are loss averse. Previous work has shown that health insurance plan switching costs can increase welfare by reducing adverse selection. Loss aversion provides a natural mechanism for modeling non-pecuniary switching costs and thus gives a basis for modeling insurance choice in environments where explicit switching costs might be minimal. I also derive a test for the presence of both adverse selection and switching costs based on differential spending of switchers and non-switchers. I test this model using data from a benefits firm providing employment-based health insurance. Employees choose between low and high coverage plans from the same insurer during the annual open enrollment period, and explicit switching costs are likely to be low. I assume employees take their current plan as the reference point for choosing the next year's plan. I find evidence of adverse selection and significant switching costs. [ABSTRACT FROM AUTHOR]

• A new behavioural model called 'Adaptive loss aversion' is proposed. • In the model, agents have non-equilibrium beliefs and are loss averse when selecting strategies. • When the outcome from playing a strategy is better than anticipated, agents become less loss averse (and vice versa). • An experiment is reported that explores the model's predictions. • Some of the model's main predictions are supported. This paper develops a new behavioral model of how experience affects willingness to trade called adaptive loss aversion. In the model, agents do not recognize that others have different information. Loss aversion makes them cautious. When trading, this protects them from being exploited by better-informed traders. The degree of loss aversion λ is adjusted in response to experience and carries over between games. When outcomes are better than anticipated, λ decreases; when outcomes are worse than anticipated, it increases. A repeated market experiment with symmetric and asymmetric information is used to test the model. The data are noisier than anticipated but some of the model' s main predictions are supported. A structural version of the model is estimated using the experimental data and data from two previous experiments on the winner's curse. A range of other behavioral game theory models is also estimated using the same data and the fit of the models is compared. [ABSTRACT FROM AUTHOR]

The phase-in and phase-out of benefits as part of social safety nets has the potential to distort individuals' labor supply decisions. Classical economic theory predicts a strong incentive to adjust labor supply and bunch at the discontinuities that arise within notched tax systems. However, such behavior has been difficult to observe in both survey and administrative data. In this paper, we design a laboratory experiment to explore the impact of notches on subjects' bunching behavior within an environment where subjects receive full information about their payment schedules and can freely adjust their labor supply (number of tasks completed). While we find clear evidence of bunching under our notched payment system, many subjects still fail to bunch. We explore the role of behavioral factors such as self-control, overconfidence, and loss aversion as potential determinants of bunching behavior. Our results indicate that, within our sample, self-control and loss aversion have a positive and significant association with subjects' decision to bunch, while overconfidence has a negative association. These estimates are of the expected sign and suggest that behavioral factors may serve as important underlying determinants of an individual's decision to bunch. [ABSTRACT FROM AUTHOR]

• We explore the implications of asymmetric reciprocity for employment contracts; • Loss aversion implies negative reciprocity is stronger than positive reciprocity; • Adaptation of reference wages explains why workers reciprocity is temporary; • Loss aversion and reference wage adaptation lead to dynamic downward wage rigidity; • Expected wage rigidity doesn't necessarily imply wage compression, but reduces hiring. We develop a model of asymmetric reciprocity and optimal wage setting based on contractual incompleteness, fairness, and reference dependence and loss aversion in the evaluation of wages by workers. The model establishes a positive wage-effort relationship capturing a worker's 'asymmetric reference-dependent reciprocity', in which loss aversion implies negative reciprocity is stronger than positive reciprocity. Our theory provides an explanation for the observed asymmetry and dynamics of workers' reciprocity and establishes a micro-foundation for downward wage rigidity, the implications of which shed new light on a forward-looking firm's optimal wage setting and hiring decisions. [ABSTRACT FROM AUTHOR]

• We introduce an approach to generalise loss aversion estimation. • We remove the need to impose unnecessary restriction on model estimation. • We find support for Prospect Theory and evidence of mild loss aversion. • Our results support the need for allowing respondent heterogeneity. • Researchers should avoid a priori imposing average conditions on participants. Parameteric identification of loss aversion requires either the imposition of rotational symmetry on the utility function or a point dependent normalization condition. In this paper, we propose a new approach in which point dependence is reduced by integration over normalization points. To illustrate our approach, we consider a sample of Ghanaian farmers' risk preferences over the gain, loss and mixed domains. Using Bayesian econometric methods, we find support for Prospect Theory albeit with substantial behavioral variation across individuals plus mild overweighting of losses compared to gains. We also show that the majority of respondents are mildly loss averse especially as the size of the payoffs increase. [ABSTRACT FROM AUTHOR]

Highlights • Our theory shows that the extent to which individuals behave dishonestly is sensitive to the probability of observed outcomes. • We demonstrate robust support for this theory by reanalyzing the results from the extant literature on lying. • We designed a new experiment that varies the outcome probabilities and is run double-anonymous. • It confirms that the proportion of people that lie to avoid a low payoff is higher when this outcome is less likely. Abstract We theoretically show that loss-averse agents are more likely to lie to avoid receiving a low payoff after a random draw the lower the ex-ante probability of this bad outcome. The ex-ante expected payoff increases as the bad outcome becomes less likely, and hence the greater is the loss avoided by lying. We demonstrate robust support for this theory by reanalyzing the results from the extant literature and with a new experiment that varies the outcome probabilities and is run double-anonymous. [ABSTRACT FROM AUTHOR]

Highlights • Bernoullis original utility function is reference dependent. • A reference dependent loss aversion index can be constructed from Bernoullis original utility function. • A modified Fishers z-transform test can be used to test the loss aversion index. • Large and small sample tests of loss aversion index are introduced. Abstract Some analysts claim that Bernoulli's utility function is "reference-independent", so it is not able to generate a loss aversion index, and that the theoretical framework of Prospect Theory (PT) is required to achieve those results. This paper examines that claim and finds that the geometry of Bernoulli's original utility function specification either explains or implies key elements of PT: reference dependence and a loss aversion index. Theory and evidence show that the loss aversion index constructed from reference wealth in Bernoulli's utility specification is in the domain of attraction of a stable law. That is, its distribution is a slow varying function with a fat tail that decays like a power law. Additionally, the index can be tested with a modified Fisher z-transform test. Bernoulli's utility function also sheds light on why loss aversion may be over-estimated under PT. In a nutshell, Bernoulli's utility function is alive and well. [ABSTRACT FROM AUTHOR]

Highlights • Price paths influence investments even when they do not carry relevant information. • Differently labeled paths influence investments differently. • Several path characteristics are identified as relevant. Abstract Price paths are often the only graphical representation of financial products investors receive before making an investment decision. We argue that price paths serve as "graphical" frames that influence the perceived attractiveness of an asset by highlighting specific asset characteristics. In a controlled lab experiment we find that price paths have an impact on investment decisions. In a regression we test a simple model relating the perception of price path shapes to several heuristics. These heuristics are: focusing on more recent outcomes, deriving implicit reference prices from focal prices, focusing on losses, and estimating risk from the amplitude of the path. We conclude that investment decisions are systematically biased due to the shape of an asset's price path. [ABSTRACT FROM AUTHOR]

Highlights • A theoretical framework for the loss aversion in tennis is provided. • A novel data set from 2013 Dubai Tennis Championships was used to test our theory. • Semi parametric additive mixed models are used as empirical methodology. • Empirical results show loss aversion kicks in earlier for male players. • There is more loss aversion when stakes are higher. Abstract We provide further evidence for the existence of loss aversion in a high-stakes context: professional tennis. Our contribution to the literature is threefold: (1) We provide a theoretical framework as a basis of our investigation, (2) we test the predictions of our model by using a novel dataset for both male and female players from the Dubai Tennis Championships 2013 that not only includes the serve speed but also the serve location, and (3) we employ semiparametric Additive Mixed Models to include smooth one-, two- and three-dimensional interaction effects for modelling the serve speed and placement. Our results show that when behind in score players put more effort into the serve than when they are ahead. We also document that players take more risks in the final. Finally, we detect remarkable gender differences with respect to the incidence of loss aversion within a game versus within a set. [ABSTRACT FROM AUTHOR]

This study examines how career considerations influence risky decisions in the labor market for college football head coaches. We use historical data to predict, based on information available prior to the beginning of a given season, whether a coach will be fired or promoted after that season. Indices created from these models are used, along with other relevant data, to analyze the risky decision to attempt a fourth down conversion. We find that decision-making is sensitive to perceived job stability. Coaches who are more likely to be fired become more conservative, attempting fewer fourth down conversions. Conversely, coaches who are more likely to be promoted undertake more risk by attempting to convert more fourth downs. The result is that coaches with less job security are more likely to make decisions that are sub-optimal from the perspective of win-maximization. [ABSTRACT FROM AUTHOR]

This paper uses a laboratory experiment to show that principals can defer all incentives for present effort to future payments—and thus pay fixed wages—and still motivate workers at the least cost whenever outcomes are observable. This result contrasts with the prediction of the classical moral hazard model, according to which future and present payments must be made contingent on present outcomes to induce effort at the least cost. Even though risk aversion cannot explain this result, I estimate an expectation-based reference-dependent model to show that it is consistent with loss aversion. [ABSTRACT FROM AUTHOR]

We consider a simple trading relationship between an expectation-based loss-averse buyer and a profit-maximizing seller. When writing a long-term contract the parties have to rely on renegotiation in order to ensure materially efficient trade ex post. We show that if the buyer expects renegotiation to occur, the seller can opportunistically exploit the buyer's attachment to the expected outcome of renegotiation. In other words, incomplete contracts create a new type of hold-up problem. If credible, the buyer prefers to expect not to renegotiate, which gives rise to ex post inefficiencies. In a next step, we allow the buyer to undertake a non-contractible investment. We find that loss aversion can mitigate the traditional hold-up problem. [ABSTRACT FROM AUTHOR]

This paper utilizes a high frequency dataset on taxi rides in New York City to investigate how emotions due to sporting event outcomes affect passengers’ tipping behavior. I formulate and empirically test a reference-dependent preferences framework of tipping behavior. The results indicate that the tipping amounts are driven by deviations from expectations much more so than wins and losses, with the most salient effects found under unexpected close wins. However, there is no support for loss aversion. The findings suggest that loss averse behavior may be subdued in the presence of social norms while surprises can result in freedom on the upside of tipping. [ABSTRACT FROM AUTHOR]

I present a model of occupational choice where an agent decides whether to invest in a project that yields risky returns or a project that yields safe returns. An agent's utility is affected by the presence of an aspiration level which will only be satisfied if their final income is above the poverty line. I show that agents who are sufficiently above the poverty line will invest in the risky project and are able to aspire for success. An agent, however, who is just above the poverty line, may be so concerned about falling into poverty that they choose to invest in the safe project. These individuals aspire only to survive. Alternatively, if an agent is sufficiently below the poverty line, then they will invest in the risky project even if expected returns are lower than the safe project. These individuals have “nothing left to lose” and therefore aspire to escape. Two forms of poverty traps emerge from the resulting equilibria: one above the poverty line, and one below the poverty line. Finally, I offer empirical support for the model based on individual level survey data across a large number of countries. [ABSTRACT FROM AUTHOR]

The newsvendor problem denotes the puzzle that a retailer facing an uncertain demand for some product underreacts to profit margins, and hence adjusts the order quantity toward the expected demand. Due to its range of applications in operations management, this problem has drawn much interest in recent years. Various articles have tried to reconcile the newsvendor problem with loss aversion under ad hoc assumptions on the underlying reference point. We, instead, argue that the newsvendor problem is an application of the well-studied compromise effect . As the compromise effect is based on violations of the IIA axiom, we argue that models of context-dependent behavior, such as salience theory, better explain newsvendor-like behavior than loss aversion-based models. We conduct a novel experiment which allows us to clearly distinguish between the role of loss aversion and salience, and find strong support for the latter. Thereby, we also add to the agenda of comparing loss aversion-based models and salience theory. [ABSTRACT FROM AUTHOR]

We develop a model of student decision making that shows that it depends on the culture of competitiveness in a country or region whether it is optimal to choose a school design with ability tracking or comprehensive schooling. Students with different cultural background differ in their concern for relative position in the classroom, which is modeled by reference-dependent preferences. We contrast competitive cultures, where students compare their performance with the best performance in class, and non-competitive cultures where the reference point is the average performance. Taking into account students with heterogeneous abilities, we show that the average performance in competitive cultures is maximized under comprehensive schooling and in non-competitive cultures under ability tracking. Segregation of abilities, however, always leads to a higher dispersion of performances. [ABSTRACT FROM AUTHOR]

We extend the analysis of a riskless choice experiment reported recently by Hochman et al. (2014) . Participants select from among sets of standard playing cards valued by a simple formula. In some sessions, participants are given a prepayment associated with some of the cards, which need not be the earnings-maximizing ones. Hochman et al. (2014) find that participants choose an earnings-maximizing card less frequently when another card is prepaid. We replicate this result under the original instructions, but not with instructions which explain the payment process more explicitly. Participants who state they do not consider themselves good at mathematics make earnings-maximizing choices much less frequently overall, but those who express self-confidence in mathematics drive the treatment effect. The results suggest that even when comparisons among choices require only simple quantitative reasoning steps, market designers and regulators may need to pay close attention to how the terms of offers are expressed, explained, and implemented. [ABSTRACT FROM AUTHOR]

We present a new partial equilibrium theory of price adjustment, based on consumer loss aversion. In line with prospect theory, the consumers’ perceived utility losses from price increases are weighted more heavily than the perceived utility gains from price decreases of equal magnitude. Price changes are evaluated relative to an endogenous reference price, which depends on the consumers’ rational price expectations from the recent past. By implication, demand responses are more elastic for price increases than for price decreases and thus firms face a downward-sloping demand curve that is kinked at the consumers’ reference price. Firms adjust their prices flexibly in response to variations in this demand curve, in the context of an otherwise standard dynamic neoclassical model of monopolistic competition. The resulting theory of price adjustment is starkly at variance with past theories. We find that – in line with the empirical evidence – prices are more sluggish upwards than downwards in response to temporary demand shocks, while they are more sluggish downwards than upwards in response to permanent demand shocks. The degree of these asymmetries, in turn, depends on the size of the shock. [ABSTRACT FROM AUTHOR]

Many economically relevant activities are executed under notable time pressures. Incentivized deadlines are often the reason people feel pressured. In such an environment, individual preferences can predict performance. Through a laboratory experiment, we examine the predictive power of individual loss aversion on performance under deadline-dependent incentives. Participants worked on a real effort task under two payoff-equivalent contracts framed in bonus and malus terms. The results show lower performance for individuals with high loss aversion when working under a malus contract. These individuals needed more time to reply and were less able to avoid maluses than other individuals. Choking can explain this observed behavior. [ABSTRACT FROM AUTHOR]