36 Pages Posted: 26 Nov 2014 Last revised: 19 Nov 2015
Date Written: November 17, 2015
A large body of evidence shows that psychologically salient reference points distort economic behavior. This paper shows that declined options can provide reference points, motivating decision makers to do no worse than the counterfactual outcomes of the options they declined. I exploit a discontinuity in the assignment of an option: subjects on one side of a boundary may choose to achieve a particular outcome with certainty, while otherwise equivalent subjects on the other side may not. Those who decline the option and those who never face it exert effort to achieve a continuously valued reward. Consistent with loss-averse effort provisioning, subjects who decline the option are more likely to achieve its counterfactual outcome exactly than those who never choose. These results suggest that declined options may also distort investment, labor supply, and consumption decisions by framing payoffs in relation to obsolete counterfactuals.
Keywords: declined options, loss aversion, field study
JEL Classification: D03, D81, L83
Suggested Citation: Suggested Citation