Expectations-Based Loss Aversion May Help Explain Seemingly Dominated Choices in Strategy-Proof Mechanisms

59 Pages Posted: 30 May 2019 Last revised: 7 Oct 2019

See all articles by Bnaya Dreyfuss

Bnaya Dreyfuss

Hebrew University of Jerusalem - Center for the Study of Rationality; Hebrew University of Jerusalem, Department of Economics, Students

Ori Heffetz

Cornell University - S.C. Johnson Graduate School of Management; The Hebrew University of Jerusalem - Department of Economics and Center for Rationality; National Bureau of Economic Research (NBER)

Matthew Rabin

University of California, Berkeley - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: October 4, 2019

Abstract

Deferred Acceptance (DA), a widely implemented algorithm, is meant to improve allocations: under classical preferences, it induces preference-concordant rankings. However, recent evidence shows that—in both real, large-stakes applications and experiments—participants frequently play seemingly dominated, significantly costly, strategies that avoid small chances of good outcomes. We show theoretically why, with expectations-based loss aversion, this behavior may be partly intentional. Reanalyzing existing experimental data on random serial dictatorship (a restriction of DA), we show that such reference-dependent preferences, with a degree and distribution of loss aversion that explain common levels of risk aversion elsewhere, fit the data better than do no-loss-aversion preferences.

Keywords: dominated strategies, market design, obvious misrepresentation, school choice, strategy-proof, expectations, beliefs, reference-dependent preferences, endowment effect, prospect theory, first-order-stochastic-dominance violations

JEL Classification: B49, D47, D82, D84, D91

Suggested Citation

Dreyfuss, Bnaya and Heffetz, Ori and Rabin, Matthew, Expectations-Based Loss Aversion May Help Explain Seemingly Dominated Choices in Strategy-Proof Mechanisms (October 4, 2019). Available at SSRN: https://ssrn.com/abstract=3381244 or http://dx.doi.org/10.2139/ssrn.3381244

Bnaya Dreyfuss

Hebrew University of Jerusalem - Center for the Study of Rationality ( email )

Givat Ram
Jerusalem
Israel

Hebrew University of Jerusalem, Department of Economics, Students ( email )

Jerusalem
Israel

Ori Heffetz (Contact Author)

Cornell University - S.C. Johnson Graduate School of Management ( email )

324 Sage Hall
Ithaca, NY 14853
United States

The Hebrew University of Jerusalem - Department of Economics and Center for Rationality

Mount Scopus
Jerusalem, Jerusalem 91905
Israel

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://www.nber.org/~heffetz

Matthew Rabin

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States

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