Bang for the Buck: Gain-Loss Ratio as a Driver of Judgment and Choice

Bart de Langhe () and Stefano Puntoni ()
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Bart de Langhe: Leeds School of Business, University of Colorado, Boulder, Colorado 80309
Stefano Puntoni: Rotterdam School of Management, Erasmus University, 3062 PA Rotterdam, The Netherlands

Management Science, 2015, vol. 61, issue 5, 1137-1163

Abstract: Prominent decision-making theories propose that individuals (should) evaluate alternatives by combining gains and losses in an additive way. Instead, we suggest that individuals seek to maximize the rate of exchange between positive and negative outcomes and thus combine gains and losses in a multiplicative way. Sensitivity to gain-loss ratio provides an alternative account for several existing findings and implies a number of novel predictions. It implies greater sensitivity to losses and risk aversion when expected value is positive, but greater sensitivity to gains and risk seeking when expected value is negative. It also implies more extreme preferences when expected value is positive than when expected value is negative. These predictions are independent of decreasing marginal sensitivity, loss aversion, and probability weighting—three key properties of prospect theory. Five new experiments and reanalyses of two recently published studies support these predictions. This paper was accepted by Yuval Rottenstreich, judgment and decision making .

Keywords: gain-loss ratio; efficiency; decreasing marginal sensitivity; loss aversion; probability weighting; prospect theory; risk preference; mixed gambles (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (5)

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