Do People Anticipate Loss Aversion?

49 Pages Posted: 13 Apr 2015

See all articles by Alex Imas

Alex Imas

University of Chicago - Booth School of Business

Sally Sadoff

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

Anya Samek

University of California, San Diego (UCSD) - Rady School of Management; Center for Economic and Social Research (CESR)

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Date Written: March 13, 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.

JEL Classification: D030

Suggested Citation

Imas, Alex and Sadoff, Sally and Samek, Anya, Do People Anticipate Loss Aversion? (March 13, 2015). CESifo Working Paper Series No. 5277, Available at SSRN: https://ssrn.com/abstract=2593693

Alex Imas

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Sally Sadoff (Contact Author)

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 Samek

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

9500 Gilman Drive #0553
Rady School of Management
La Jolla, CA 92093-0553
United States

HOME PAGE: http://anyasamek.com

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

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Los Angeles, CA 90089-3332
United States

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