A Structural Analysis of Disappointment Aversion in a Real Effort Competition
University of Oxford - Department of Economics
Victoria L. Prowse
Cornell University - Department of Economics; Institute for the Study of Labor (IZA); German Institute for Economic Research (DIW Berlin)
September 1, 2010
American Economic Review, Forthcoming
We develop a novel computerized real effort task, based on moving sliders across a screen, to test experimentally whether agents are disappointment averse when they compete in a real effort sequential-move tournament. We predict that a disappointment averse agent, who is loss averse around her endogenous choice-acclimating expectations-based reference point, responds negatively to her rival's effort. We find significant evidence for this discouragement effect, and use the Method of Simulated Moments to estimate the strength of disappointment aversion on average and the heterogeneity in disappointment aversion across the population.
Number of Pages in PDF File: 36
Keywords: Disappointment aversion, Loss aversion, Reference-dependent preferences, Reference point adjustment, Expectations, Tournament, Real effort experiment, Slider task
JEL Classification: C91, D03
Date posted: March 31, 2010 ; Last revised: July 26, 2011
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