The Silver Lining Effect: Formal Analysis and Experiments

Management Science, Forthcoming

29 Pages Posted: 8 Aug 2009

See all articles by Peter Jarnebrant

Peter Jarnebrant

Independent

Olivier Toubia

Columbia Business School - Marketing

Eric J. Johnson

Columbia Business School - Marketing

Multiple version iconThere are 3 versions of this paper

Date Written: August 3, 2009

Abstract

The silver lining effect predicts that segregating a small gain from a larger loss results in greater psychological value than does integrating them into a smaller loss. Using a generic prospect theory value function, we formalize this effect and derive conditions under which it should occur. We show analytically that if the gain is smaller than a certain threshold, segregation is optimal. This threshold increases with the size of the loss and decreases with the degree of loss aversion of the decision maker. Our formal analysis results in a set of predictions suggesting that the silver lining effect is more likely to occur when: (i) the gain is smaller (for a given loss), (ii) the loss is larger (for a given gain), (iii) the decision maker is less loss averse. We test and confirm these predictions in two studies of preferences, both in a non-monetary and a monetary setting, analyzing the data in a hierarchical Bayesian framework.

Keywords: Mental accounting, Prospect Theory, Loss Aversion

JEL Classification: M00, M31, D8, D11, D12

Suggested Citation

Jarnebrant, Peter and Toubia, Olivier and Johnson, Eric J., The Silver Lining Effect: Formal Analysis and Experiments (August 3, 2009). Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1443404

Peter Jarnebrant (Contact Author)

Independent

No Address Available

Olivier Toubia

Columbia Business School - Marketing ( email )

New York, NY 10027
United States

Eric J. Johnson

Columbia Business School - Marketing ( email )

New York, NY 10027
United States

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