A Behavioral Account of Compensation Awarding Decisions

Journal of Behavioral Decision Making, Vol. 21, pp. 1-15, 2008

15 Pages Posted: 3 Nov 2008 Last revised: 10 Dec 2008

Claire I. Tsai

University of Toronto - Joseph L. Rotman School of Management

Christopher K. Hsee

University of Chicago - Booth School of Business

Date Written: November 3, 2008

Abstract

Suppose an individual loses an irreplaceable object and someone else is at fault. How much should he be compensated? Normatively, compensation should equal the value (utility) to the victim. Our experiments demonstrate that compensation decisions often ignore value and are instead based on cost (how much the victim originally paid for the item) except when cost is zero. For example, we found that people awarded $200 for a destroyed item worth $500 to the victim if the cost was $200; however, they awarded $500 if the original cost was zero. We explain these phenomena in terms of lay scientism (the tendency to base decisions on objective factors) and discuss how the prevalent cost-based compensation rule hurts consumer welfare. Copyright # 2008 John Wiley & Sons, Ltd.

Keywords: compensation, rationale, lay rationalism, rule, consumer welfare

JEL Classification: D81. D11, D12, D91

Suggested Citation

Tsai, Claire I. and Hsee, Christopher K., A Behavioral Account of Compensation Awarding Decisions (November 3, 2008). Journal of Behavioral Decision Making, Vol. 21, pp. 1-15, 2008. Available at SSRN: https://ssrn.com/abstract=1294096

Claire I. Tsai

University of Toronto - Joseph L. Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6
Canada
416 946 3128 (Phone)
416 978 5433 (Fax)

HOME PAGE: http://www.rotman.utoronto.ca/facbios/viewFac.asp?facultyID=Claire.Tsai

Christopher K. Hsee (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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