An experimental test of loss aversion and scale compatibility

Han Bleichrodt and José Luis Pinto

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: This paper studies two important reasons why people violate procedure invariance, loss aversion and scale compatibility. The paper extends previous research on loss aversion and scale compatibility by studying loss aversion and scale compatibility simultaneously, by looking at a new decision domain, medical decision analysis, and by examining the effect of loss aversion and scale compatibility on "well-contemplated preferences." We find significant evidence both of loss aversion and scale compatibility. However, the sizes of the biases due to loss aversion and scale compatibility vary over trade-offs and most participants do not behave consistently according to loss aversion or scale compatibility. In particular, the effect of loss aversion in medical trade-offs decreases with duration. These findings are encouraging for utility measurement and prescriptive decision analysis. There appear to exist decision contexts in which the effects of loss aversion and scale compatibility can be minimized and utilities can be measured that do not suffer from these distorting factors.

Keywords: Decision analysis; utility theory; loss aversion; scale compatibility; health (search for similar items in EconPapers)
JEL-codes: C91 D81 I10 (search for similar items in EconPapers)
Date: 2000-05
New Economics Papers: this item is included in nep-exp
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: An experimental test of loss aversion and scale compatibility (2000)
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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:467

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