The Silver Lining Effect: Formal Analysis and Experiments

Managem Science, Vol. 55, No. 11, pp. 1832-1841, November 2009

Columbia Business School Research Paper

10 Pages Posted: 9 Nov 2011  

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: 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), and (iii) the decision maker is less loss averse. We test and confirm these predictions in two studies of preferences, both in a nonmonetary and a monetary setting, analyzing the data in a hierarchical Bayesian framework.

Keywords: utility-preference, estimation, theory, prospect theory, loss aversion

Suggested Citation

Jarnebrant, Peter and Toubia, Olivier and Johnson, Eric J., The Silver Lining Effect: Formal Analysis and Experiments (2009). Managem Science, Vol. 55, No. 11, pp. 1832-1841, November 2009; Columbia Business School Research Paper. Available at SSRN: https://ssrn.com/abstract=1957343

Peter Jarnebrant

Independent

No Address Available

Olivier Toubia

Columbia Business School - Marketing ( email )

New York, NY 10027
United States

Eric J. Johnson (Contact Author)

Columbia Business School - Marketing ( email )

New York, NY 10027
United States

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