Loss Aversion, Reference Dependence and Diminishing Sensitivity in Choice Experiments

37 Pages Posted: 4 Sep 2015 Last revised: 13 Jan 2016

See all articles by Anthony Scott

Anthony Scott

University of Melbourne - Melbourne Institute: Applied Economic & Social Research

Julia Witt

University of Manitoba - Department of Economics

Date Written: September 1, 2015

Abstract

In the discrete choice experiment literature, it has been argued that the choice sets from which respondents choose should include an unforced choice because this is more realistic and accounts for status quo bias. However, we propose a much stronger set of arguments for preferring to use unforced choices where relevant. These relate to the concepts of loss aversion, reference dependence and diminishing sensitivity from prospect theory. We use data from a discrete choice experiment of different types of jobs for nurses, where the introduction of a third alternative, representing the respondent’s current job, changes the reference point, which is different for each respondent. The increased salience of the reference point, in turn, changes the size of any losses or gains when comparing Job A or Job B with their current situation, and since losses are valued more than gains, this affects the marginal utility of each attribute. This has implications for policy conclusions based on willingness to pay. Including an unforced choice is necessary (when appropriate) not only for the purposes of ‘realism’, but also because different marginal utilities are produced due to loss aversion, reference dependence and diminishing sensitivity.

Keywords: Discrete choice experiments, loss aversion, reference dependence, diminishing sensitivity, health workforce

JEL Classification: I11, J24, J32, D80, C99

Suggested Citation

Scott, Anthony and Witt, Julia, Loss Aversion, Reference Dependence and Diminishing Sensitivity in Choice Experiments (September 1, 2015). Melbourne Institute Working Paper No. 16/15, Available at SSRN: https://ssrn.com/abstract=2655266 or http://dx.doi.org/10.2139/ssrn.2655266

Anthony Scott

University of Melbourne - Melbourne Institute: Applied Economic & Social Research ( email )

Level 5, FBE Building, 111 Barry Street
Parkville, Victoria 3010
Australia

Julia Witt (Contact Author)

University of Manitoba - Department of Economics ( email )

Winnipeg, Manitoba R3T 5V5
Canada

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