Do People Anticipate Loss Aversion?
Carnegie Mellon University - Department of Social and Decision Sciences
University of California, San Diego (UCSD) - Rady School of Management
Anya Savikhin Samek
The University of Chicago; University of Wisconsin - Madison - School of Human Ecology
March 18, 2014
In this paper, we directly test a central prediction of loss aversion in contracting: in order to avoid losses, people will exert more effort under a contract in a loss frame than a gain frame. Anticipating this, they will prefer the gain-framed contract if given the choice. In a series of laboratory experiments, we find that individuals do indeed work harder when incentives are framed as a loss. However, we do not find evidence that they prefer the gain frame. In fact, our results suggest that individuals have a directional preference for contracts framed as a loss. These findings have implications for the theory of reference-dependent preferences and optimal incentive design.
Number of Pages in PDF File: 48
Keywords: loss aversion, incentives, contracts, framing
JEL Classification: C91, J33, M54
Date posted: March 20, 2014 ; Last revised: June 3, 2014
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