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Do People Anticipate Loss Aversion?

48 Pages Posted: 20 Mar 2014 Last revised: 10 Apr 2015

Alex Imas

Carnegie Mellon University - Department of Social and Decision Sciences

Sally Sadoff

University of California, San Diego (UCSD) - Rady School of Management

Anya Savikhin Samek

Center for Economic and Social Research (CESR); The University of Chicago

Multiple version iconThere are 2 versions of this paper

Date Written: March 10, 2015

Abstract

There is growing interest in the use of loss contracts that offer performance incentives as upfront payments that employees can lose. Standard behavioral models predict a tradeoff in the use of loss contracts: employees will work harder under loss contracts than under gain contracts; but, anticipating loss aversion, they will prefer gain contracts to loss contracts. In a series of experiments, we test these predictions by measuring performance and preferences for payoff-equivalent gain and loss contracts. We find that people indeed work harder under loss than gain contracts, as the theory predicts. Surprisingly, rather than a preference for the gain contract, we find that people actually prefer loss contracts. In exploring mechanisms for our results, we find suggestive evidence that people do anticipate loss aversion but select into loss contracts as a commitment device to improve performance.

Keywords: loss aversion, incentives, contracts, framing

JEL Classification: C91, J33, M54

Suggested Citation

Imas, Alex and Sadoff, Sally and Samek, Anya Savikhin, Do People Anticipate Loss Aversion? (March 10, 2015). Available at SSRN: https://ssrn.com/abstract=2411023 or http://dx.doi.org/10.2139/ssrn.2411023

Alex Imas

Carnegie Mellon University - Department of Social and Decision Sciences ( email )

Pittsburgh, PA 15213-3890
United States

Sally Sadoff

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

Anya Savikhin Samek (Contact Author)

Center for Economic and Social Research (CESR) ( email )

635 Downey Way
Los Angeles, CA 90089-3332
United States

The University of Chicago ( email )

Chicago, IL 60637
United States

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