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

Bnaya Dreyfuss, Ori Heffetz and Matthew Rabin

No 26394, NBER Working Papers from National Bureau of Economic Research, Inc

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 no-loss-aversion preferences.

JEL-codes: B49 D47 D82 D84 D91 (search for similar items in EconPapers)
Date: 2019-10
New Economics Papers: this item is included in nep-des, nep-exp, nep-ore and nep-upt
Note: ED PE
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