competition under consumer loss aversion we address the effect of expectation based consumer loss aversion on firm strategy in imperfect competition consumers are fully informed about match value and price at the moment of purchase however some consumers are initially uninformed about their tastes and form a reference point consisting of an expected match value and price distribution whereas others are perfectly informed all the time we show that if firms have symmetric costs a larger share of informed consumers leads to a more competitive outcome the reverse holds if cost asymmetry in duopoly is sufficiently large

outcome based accountability theory and evidence abstract a firm s payoffs can often depend on whether it exceeds a threshold of performance in a principal agent setting we demonstrate that the optimal contract induces efficient effort by basing firing decisions solely on whether the agent was successful even though the absolute level of performance is more informative we test the predictions of our model using thirty seasons of nfl data we find that a coach is 6 percentage points more likely to be fired after a close loss beyond this the margin of victory has no significant impact on firing probabilities despite being more informative about future success also consistent with the predictions of our model coaches maximize team effort by playing their best players when doing so has the largest impact on the probability of winning

is tiger woods loss averse persistent bias in the face of experience competition and high stakes although experimental studies have documented systematic decision errors many leading scholars believe that experience competition and large stakes will reliably extinguish biases we test for the presence of a fundamental bias loss aversion in a high stakes context professional golfers performance on the pga tour golf provides a natural setting to test for loss aversion because golfers are rewarded for the total number of strokes they take during a tournament yet each individual hole has a salient reference point par we analyze over 2 5 million putts using precise laser measurements and find evidence that even the best golfers including tiger woods show evidence of loss aversion jel d03 d81 l83

reference dependent preferences and labor supply the case of new york city taxi drivers i develop a model of daily labor supply where preferences are dependent on a reference daily income level and i apply this model to data on the labor supply of new york city taxi drivers i find that there may be a reference level of income on a given day that affects labor supply however there is substantial day to day variation in a given driver s reference level and most shifts end before reaching the reference income level this pattern is inconsistent with an important role for reference dependent preferences

are professional basketball players reference dependent abstractmodels with reference dependent preferences suggest that agents exert considerable effort to avoid falling below a reference point and losing we provide visual and statistical evidence that player performances in the national basketball association nba bunch at salient normatively extraneous round numbers using data on nearly three million shot attempts with precise x y coordinates we find that players improve free throw accuracy and attempt shots closer to the hoop when shooting for a round number the results are strongest for players on home teams suggesting that the reference dependent enters preferences through an external social evaluation channel

target setting in tournaments theory and evidence from china motivated by the prevalence of economic targets at all levels of territory administration in china this article proposes a tullock contest model to study optimal target setting in a multi layered tournament based organisation in our model targets are used by upper level officials to convey the importance of economic growth and incentivise subordinates in the tournaments our model predicts a top down amplification of economic growth targets along the jurisdiction levels which explains the observed pattern in china using both provincial and prefectural level data we test the model predictions and find consistent evidence

optimal task assignments with loss averse agents abstract this paper studies optimal task assignments in a setting where agents are expectation based loss averse according to koszegi and rabin 2006 2007 and are compensated according to an aggregated performance measure in which tasks are technologically independent we show that the optimal task assignment is determined by a trade off between paying lower compensation costs and restricting the set of implementable effort profiles under multitasking we show that loss aversion combined with how much the marginal cost of effort in one task increases with the effort chosen in other tasks determines when multitasking saves on compensation costs but results in an implementation problem

continuity in auction design abstract j cremer and r p mclean econometrica56 1988 1247 1257 have shown that the auctioneer can extract all the surplus when the private valuations of bidders are not statistically independent the paper shows that this result does not necessarily arise under limited liability or risk aversion under limited liability and or risk aversion we prove that the functions corresponding to the auctionner s optimal expected gain and to the maximum total surplus are continuous in the space of possible information distributions thus by continuity the auctioneer wil not be able to extract all the rents when bidders private valuations are approximately independent

how many pears would a pear packer pack if a pear packer could pack pears at quasi exogenously varying piece rates abstract we examine labor supply using a unique dataset collected from a large pear packing factory pear packers face both expected and unexpected shocks to their wages and we use this to evaluate different models of inter temporal labor supply we find strong evidence for reference dependent preferences but only mixed support for models of rational expectations based targets

wage elasticities in working and volunteering the role of reference points in a laboratory study we experimentally test how effort responds to wages randomly assigned to accrue to individuals or to a charity in the presence of expectations based reference points or targets when individuals earn money for themselves higher wages lead to higher effort with relatively muted targeting behavior when individuals earn money for a charity higher wages instead lead to lower effort with substantial targeting behavior a reference dependent theoretical framework suggests an explanation for this differential impact when individuals place less value on earnings such as when accruing earnings for a charity instead of themselves more targeting behavior and a more sluggish response to incentives should result results from an additional experiment add support to this explanation when individuals select into earning money for a charity and thus likely place a higher value on those earnings targeting behavior is muted and no longer generates a negative effort response to higher wages data and the online appe

the behavioralist visits the factory increasing productivity using simple framing manipulations recent discoveries in behavioral economics have led to important new insights concerning what can happen in markets such gains in knowledge have come primarily via laboratory experiments a missing piece of the puzzle in many cases is parallel evidence drawn from naturally occurring field counterparts we provide a small movement in this direction by taking advantage of a unique opportunity to work with a chinese high tech manufacturing facility our study revolves around using insights gained from one of the most influential lines of behavioral research framing manipulations in an attempt to increase worker productivity in the facility using a natural field experiment we report several insights for example conditional incentives framed as both losses and gains increase productivity for both individuals and teams in addition teams more acutely respond to bonuses posed as losses than as comparable bonuses posed as gains the magnitude of this framing effect is roughly 1 that is total team productivity is enhanced by 1 purely due to the framing manipulation importantly we find that neither the framing nor the incentive effect lose their significance over time rather the effects are observed over the entire sample period moreover we learn that repeated interaction with workers and conditionality of the bonus contract are substitutes for sustenance of incentive effects in the long run this paper was accepted by gerard p cachon decision analysis

salient compromises in the newsvendor game abstract the newsvendor problem denotes the puzzle that a retailer facing an uncertain demand for some product underreacts to profit margins and hence adjusts the order quantity toward the expected demand due to its range of applications in operations management this problem has drawn much interest in recent years various articles have tried to reconcile the newsvendor problem with loss aversion under ad hoc assumptions on the underlying reference point we instead argue that the newsvendor problem is an application of the well studied compromise effect as the compromise effect is based on violations of the iia axiom we argue that models of context dependent behavior such as salience theory better explain newsvendor like behavior than loss aversion based models we conduct a novel experiment which allows us to clearly distinguish between the role of loss aversion and salience and find strong support for the latter thereby we also add to the agenda of comparing loss aversion based models and salience theory

do professional traders exhibit myopic loss aversion an experimental analysis two behavioral concepts loss aversion and mental accounting have been combined to provide a theoretical explanation of the equity premium puzzle recent experimental evidence supports the theory as students behavior has been found to be consistent with myopic loss aversion mla yet much like certain anomalies in the realm of riskless decision making these behavioral tendencies may be attenuated among professionals using traders recruited from the cbot we do indeed find behavioral differences between professionals and students but rather than discovering that the anomaly is muted we find that traders exhibit behavior consistent with mla to a greater extent than students

the incentive effects of levelling the playing field an empirical analysis of amateur golf tournaments levelling the playing field is an important policy instrument to guarantee an equitable competition among heterogeneous individuals however the incentive effects of those policies are usually not explicitly addressed in empirical studies in this article the performance in amateur golf tournaments is analysed to gain insights into the incentive effects of those types of policies the empirical analysis takes advantage of the fact that tournaments in amateur golf are of two distinctive types that apply different scoring rules while one scoring rule is based on gross scores i e the total number of strokes of a player the second scoring rule is based on net scores where the total number of strokes is normalized with respect to the respective player s handicap performance comparisons of players who participated in both types of tournaments suggest that levelling the playing field as in tournaments based on net score has positive and significant performance effects

reference dependent preferences team relocations and major league expansion abstract professional sports teams receive large subsidies some in excess of 500 million from local governments for the construction of new facilities these subsidies cannot be explained by tangible economic benefits and estimates of the value of intangible benefits also fall short of typical subsidies in this paper we incorporate fans reference dependent preferences into a model of the bargaining between local governments and teams the model predicts that teams use relocation threats to exploit fans utility loss from team departures a negative deviation from the status quo to extract large subsidies from local governments fans loss aversion provides an explanation of the current team distribution and observed team relocation and league expansion decisions in north america the model also highlights the importance of anti trust exemptions of the leagues in creating credible relocation threats for existing teams

a behavioral analysis of stochastic reference dependence we examine the reference dependent risk preferences of k oszegi and rabin 2007 focusing on their choice acclimating personal equilibria concept we relate their model to other existing generalizations of expected utility we demonstrate that linear gain loss choice acclimating personal equilibria is equivalent to the intersection of quadratic utility and pessimistic rank dependent utility however it has only a trivial intersection i e expected utility with other referencedependent preferences we use these relationships to extend our understanding of k oszegi and rabin s model linking their functional form to behavior demonstrating new applications and deriving new tests and looking for support in existing experimental data 98 words

exploring the scope of neurometrically informed mechanism design a basic goal in mechanism design is to construct mechanisms that simultaneously satisfy efficiency voluntary participation and dominant strategy incentive compatibility previous work has shown that this is impossible unless the agents and planner have sufficient information about each other and common knowledge these results have remained largely theoretical because the required information is generally not available in practical applications however recent work has shown that these limitations can be overcome in simple settings using neurometric technologies that provide noisy signals of subjects preferences that can be used in the mechanism design problem here we build on this work by carrying out two new experiments designed to test the extent to which these neurometrically informed mechanisms nims can be applied to more complicated and realistic environments we find robustness to large type and action space and to the degrees of loss and risk aversion observed in most of our sample

do tournaments have incentive effects much attention has been devoted to studying models of tournaments or situations in which an individual s payment depends only on his or her output or rank relative to that of other competitors academic interest derives from the fact that under certain sets of assumptions tournaments have desirable normative properties because of the incentive structures they provide our paper uses nonexperimental data to test whether tournaments actually elicit effort responses we focus on professional golf tournaments because information on the incentive structure prize distribution and measures of individual output players scores are both available we find strong support for the proposition that the level and structure of prizes in pga tournaments influence players performance

stopping on nine evidence of heuristic managerial decision making in major league baseball pitcher substitutions economic agents who exhibit left digit bias over emphasize round numbers using data on managers pitcher substitution decisions in major league baseball i find that managers remove starting pitchers more often when the next pitch will result in a pitch count ending in zero unlike counts ending in nine pitch counts ending in eight do not exhibit higher substitution rates despite the fact that pitchers usually throw multiple pitches before the manager s next decision opportunity managers apparently use rules of thumb that emphasize leftmost digits and ignore at least some future consequences of present actions however these significant biases disappear when the stakes are high i find no evidence of disproportionate substitutions on the nine s in close games and the final digit of the pitch count does not discontinuously affect the probability of winning managers act in a manner consistent with rational inattention using heuristics only when the stakes are low

pay reference points and police performance several theories suggest that pay raises below a reference point will reduce job performance final offer arbitration for police unions provides a unique opportunity to examine these theories as the police officers either receive their requested wage or receive a lower one in the months after new jersey police officers lose in arbitration arrest rates and average sentence length decline and crime reports rise relative to when they win these declines in performance are larger when the awarded wage is further from the police union s demand the findings support the idea that considerations of fairness disappointment and more generally reference points affect workplace behavior

expectations based reference dependent life cycle consumption this study incorporates a recent preference specification of expectations based loss aversion which has been applied broadly in microeconomics into a classic macro model to offer a unified explanation for three empirical observations about life cycle consumption first loss aversion explains excess smoothness and sensitivity that is the empirical observation that consumption responds to income shocks with a lag intuitively such lagged responses allow the agent to delay painful losses in consumption until his expectations have adjusted secondly the preferences generate a hump shaped consumption profile early in life consumption is low due to a first order precautionary savings motive however as uncertainty resolves over time this motive is dominated by time inconsistent overconsumption that eventually leads to declining consumption towards the end of life thirdly consumption drops at retirement prior to retirement the agent wants to overconsume his uncertain income before his expectations catch up post retirement however income is no longer uncertain and overconsumption is associated with a sure loss in future consumption as an empirical contribution i structurally estimate the preference parameters using life cycle consumption data my estimates match those obtained in experiments and other micro studies and generate the degree of excess smoothness observed in macro consumption data

neuroeconomic foundations of economic choice recent advances neuroeconomics combines methods and theories from neuroscience psychology economics and computer science in an effort to produce detailed computational and neurobiological accounts of the decision making process that can serve as a common foundation for understanding human behavior across the natural and social sciences because neuroeconomics is a young discipline a sufficiently sound structural model of how the brain makes choices is not yet available however the contours of such a computational model are beginning to arise and given the rapid progress there is reason to be hopeful that the field will eventually put together a satisfactory structural model this paper has two goals first we provide an overview of what has been learned about how the brain makes choices in two types of situations simple choices among small numbers of familiar stimuli like choosing between an apple or an orange and more complex choices involving tradeoffs between immediate and future consequences like eating a healthy apple or a less healthy chocolate cake second we show that even at this early stage insights with important implications for economics have already been gained

an endowment effect for risk experimental tests of stochastic reference points recent models of reference dependent preferences indicate that expectations may play a prominent role in the presence of behavioral anomalies a subset of such expectations based models predicts an endowment effect for risk that risk attitudes differ when reference points change from certain to stochastic in two purposefully simple risk preference experiments eliminating often discussed confounds i demonstrate both between and within subjects such an endowment effect for risk these results provide needed separation between expectations based reference dependent models allow for evaluation of recent theoretical extensions and may help to close a long standing debate in decision science on inconsistency between utility elicitation methodologies

the effect of myopia and loss aversion on risk taking an experimental test myopic loss aversion is the combination of a greater sensitivity to losses than to gains and a tendency to evaluate outcomes frequently two implications of myopic loss aversion are tested experimentally 1 investors who display myopic loss aversion will be more willing to accept risks if they evaluate their investments less often 2 if all payoffs are increased enough to eliminate losses investors will accept more risk in a task in which investors learn from experience both predictions are supported the investors who got the most frequent feedback and thus the most information took the least risk and earned the least money language en

quitters never win the adverse incentive effects of competing with superstars internal competition may motivate worker effort yet the benefits of competition may depend critically on workers relative abilities large skill differences may reduce efforts i use panel data from professional golf tournaments and find that the presence of a superstar is associated with lower performance on average golfers first round scores are approximately 0 2 strokes worse when tiger woods participates relative to when woods is absent the overall tournament effect is 0 8 strokes the adverse superstar effect varies with the quality of woods s play there is no evidence that reduced performance is attributable to media attention intensity or risky strategy adoption

expectations as endowments evidence on reference dependent preferences from exchange and valuation experiments while evidence suggests that people evaluate outcomes with respect to reference points little is known about what determines them we conduct two experiments that show that reference points are determined at least in part by expectations in an exchange experiment we endow subjects with an item and randomize the probability they will be allowed to trade subjects that are less likely to be able to trade are more likely to choose to keep their item in a valuation experiment we randomly assign subjects a high or low probability of obtaining an item and elicit their willingness to accept for it the high probability treatment increases valuation of the item by 20 30 copyright 2011 oxford university press

5 information impact and allocation rules in auctions with affiliated private values a laboratory study in affiliated private value auctions each bidder has perfect information regarding his her own value for the object at auction but higher values of the item for one bidder make higher values for other bidders more likely we report on a series of experiments examining three key implications of these auctions i in a first price auction public information about rivals values increases expected revenue ii an english auction increases expected revenue compared to a first price auction and iii a second price auction is isomorphic to an english auction in examining these issues we compare predictions of some ad hoc bidding models with nash equilibrium predictions in the first price auction experiments nash equilibrium bidding theory organizes the data better than either of two ad hoc bidding models public information about others valuations does increase average revenue but the increase in revenue is smaller and less reliable than predicted under risk neutral nash equilibrium bidding lower average revenue might be attributed to risk aversion while the high variability is attributed to a sizable frequency of individual bidding errors relative to the theory bidding theory precisely organizes english auction outcomes after a brief initial learning period the dominant strategy equilibrium does not organize second price auctions nearly as well as market prices persistently exceed predicted prices the difference between english and second price outcomes is attributed to effects of different information flows inherent in the structure of the two institutions on eliminating bidding errors revenue impacts of these two institutions relative to a first price auction are examined in light of observed bidding patterns

multiattribute loss aversion and reference dependence evidence from the performing arts industry we study the prevalence of multiattribute loss aversion and reference effects in a revenue management setting based on data of individual level purchases over a series of concert performances the reference dependence that drives consumer choice is not only based on the price but also on observed sales as a fraction of the seating capacity during their past visits we find that consumers suffer from loss aversion on both prices and seats sold consumers incur significant utility loss when prices are above their references or when the actual seat sales are lower than their references we suggest pricing policies that can address consumer decisions driven by such reference dependence and loss aversion this paper was accepted by vishal gaur operations management

an experiment on risk taking and evaluation periods does the period over which individuals evaluate outcomes influence their investment in risky assets results from this study show that the more frequently returns are evaluated the more risk averse investors will be the results are in line with the behavioral hypothesis of myopic loss aversion which assumes that people are myopic in evaluating outcomes over time and are more sensitive to losses than to gains the results have relevance for the equity premium puzzle and also for the marketing strategies of fund managers

the impact of pressure on performance evidence from the pga tour abstract do large rewards lead to psychological pressure causing underperformance previous studies have tested this choking phenomenon using the world of sports but such studies often lack an explicit link between performance and reward this study utilizes a large pga tour dataset to more directly analyze the effect of pressure on individual performance by calculating the potential change in earnings from making or missing a putt on the final hole of a tournament we find that as the amount of money riding on a shot increases the likelihood that shot is made is significantly reduced

deciding for others reduces loss aversion we study risk taking on behalf of others both when choices involve losses and when they do not a large scale incentivized experiment with subjects randomly drawn from the danish population is conducted we find that deciding for others reduces loss aversion when choosing between risky prospects for which losses are ruled out by design subjects make the same choices for themselves as for others in contrast when losses are possible we find that the two types of choices differ in particular we find that subjects who make choices for themselves take less risk than those who decide for others when losses loom this finding is consistent with an interpretation of loss aversion as a bias in decision making driven by emotions and that these emotions are reduced when making decisions for others

ever tried ever failed no matter on the demotivational effect of losing in repeated competitions abstract many important life goals require repeated confrontation with competitors losing in such competitions may discourage individuals and make them postpone further competitions thereby harming future prospects i use data on 44 799 amateur tennis players who are randomly paired in repeated competitions to study the causal effect of losing on the time to the next tournament participation results show that individuals wait on average 10 longer to enroll again after losing furthermore losing against relatively weaker opponents leads to a discontinuously larger effect than losing against relatively stronger opponents indicating that individuals do not rationally update beliefs about winning probabilities but instead use their ranking as reference point when evaluating defeats

present or future incentives on the optimality of fixed wages with moral hazard abstract this paper uses a laboratory experiment to show that principals can defer all incentives for present effort to future payments and thus pay fixed wages and still motivate workers at the least cost whenever outcomes are observable this result contrasts with the prediction of the classical moral hazard model according to which future and present payments must be made contingent on present outcomes to induce effort at the least cost even though risk aversion cannot explain this result i estimate an expectation based reference dependent model to show that it is consistent with loss aversion

the influence of serotonin deficiency on choice deferral and the compromise effect abstractpsychological and physiological states such as mood hunger stress and sleep deprivation are known to affect decision making processes and therefore crucially influence consumer behavior a possible biological mechanism underlying the observed variability of consumer behavior is the context sensitive variation in the levels of neuromodulators in the brain in a series of four experimental studies the authors pharmaceutically reduce the levels of the neurotransmitter serotonin in the brain to diminish the availability of subjects cognitive resources in doing so they study how serotonin brain levels influence 1 subjects tendency to avoid buying and 2 consumers preference for product options positioned as a compromise in a given choice set rather than for more extreme alternatives i e the compromise effect using realistic product choice scenarios in a binding decision framework they find that a reduction of brain serotonin levels leads to choice deferral and decreases the compromise

staying ahead and getting even risk attitudes of experienced poker players abstract frequent online poker players with extensive experience calculating probabilities and expected values might be expected to behave as expected utility maximizers in that small shocks to their wealth would not affect risk preferences rabin 2000 by contrast reference dependent loss aversion as in prospect theory koszegi and rabin 2006 kahneman and tversky 1979 predicts that risk aversion decreases as wealth moves away from the reference point in either direction in terms of continuing to play as well as a more aggressive playing style we find strong evidence for the break even effect the increased pursuit of risk as a player is losing within a session players behavior also appears consistent with existing evidence on reference dependent labor supply in their tendency to reduce effort and risk taking in response to being ahead our findings provide evidence for reference dependent behavior in a flexible high skilled setting under conditions of well understood monetary risk

a news utility theory for inattention and delegation in portfolio choice recent evidence suggests that investors are inattentive to their portfolios and hire expensive portfolio managers this paper develops a life cycle portfolio choice model in which the investor experiences loss averse utility over news and can ignore his portfolio in such a model the investor prefers to ignore and not rebalance his portfolio most of the time because he dislikes bad news more than he likes good news such that expected news causes a first order decrease in utility consequently the investor has a first order willingness to pay a portfolio manager who rebalances actively on his behalf moreover the investor can diversify over time and his consumption aligns with predictions of mental accounting i structurally estimate the preference parameters by matching stock shares and stock market non participation over the life cycle my parameter estimates are in line with the literature generate reasonable intervals of inattention and simultaneously explain consumption and wealth accumulation over the life cycle here it matters that news utility preserves first order risk aversion even in the presence of stochastic labor income which also causes stock shares to rise in wealth

beating irrationality does delegating to it alleviate the sunk cost effect we investigate the impact of delegating decision making to information technology it on an important human decision bias the sunk cost effect to address our research question we use a unique data set containing actual market transaction data for approximately 7 000 pay per bid auctions in contrast with the laboratory experiments of previous related studies our research presents the unique advantage of investigating the effects of it enabled automated bidding agents on the occurrence of a decision bias in real market transactions we identify normatively irrational decision scenarios and analyze consumer behavior in these situations our findings show that participants with a higher behavioral investment are more likely to violate the assumption of normative economic rationality because of the sunk cost effect more importantly we observe that the delegation of auction participation i e actual bidding to it significantly reduces the occurrence of the sunk cost effect in subsequent decisions made by the same individual we can attribute this reduction to the comparably lower behavioral investments incurred by auction participants who delegate their bidding to it in particular by mitigating different contributors of behavioral investments delegating to it reduces the likelihood of the occurrence of the sunk cost effect by more than 50 this paper was accepted by sandra slaughter information systems

correlated information and mechanism design in models of asymmetric information possession of private information leads to rents for the possessors this induces mechanism designers to distort away from efficiency the authors show that this is an artifact of the presumption that information is independently distributed rent extraction in a large class of mechanism design games is analyzed and a necessary and sufficient condition for arbitrarily small rents to private information is provided additionally the two person bargaining game is shown to have an efficient solution under first order stochastic dominance and a hazard rate condition similar conditions allow full rent extraction in milgrom weber auctions

new york city cab drivers labor supply revisited reference dependent preferences with rational expectations targets for hours and income this paper reconsiders whether cabdrivers labor supply decisions reflect reference dependent preferences following botond koszegi and matthew rabin 2006 we construct a model with targets for hours as well as income both determined by rational expectations estimating using henry s farber s 2005 2008 data we show that the reference dependent model can reconcile his 2005 finding that drivers stopping probabilities are significantly related to hours but not income with the negative wage elasticity of hours found by colin camerer et al 1997 and farber 2005 2008 the model yields sensible estimates that avoid farber s 2008 criticism that drivers income targets are too unstable to allow a useful reference dependent model of labor supply

are long term wage elasticities of labor supply more negative than short term ones standard models imply that the wage elasticity of labor supply is more negative the longer a wage change lasts i observe decreasing daily hours during short term wage increases but not during a long term one daily income goals adjusted in the long term

neoclassical theory versus prospect theory evidence from the marketplace several experimental studies have provided evidence that suggest indifference curves have a kink around the current endowment level these results which clearly contradict closely held economic doctrines have led some influential commentators to call for an entirely new economic paradigm to displace conventional neoclassical theory e g prospect theory which invokes psychological effects this paper pits neoclassical theory against prospect theory by investigating data drawn from more than 375 subjects actively participating in a well functioning marketplace the pattern of results suggests that prospect theory adequately organizes behavior among inexperienced consumers but consumers with intense market experience behave largely in accordance with neoclassical predictions moreover the data are consistent with the notion that consumers learn to overcome the endowment effect in situations beyond specific problems they have previously encountered this transference of behavior across domains has important implications in both a positive and normative sense

popular support for progressive taxation abstract the popular support obtained by two parties who propose two qualitatively different tax schemes is analyzed we show that if the median voter is below the mean then any progressive proposal wins over a regressive one

is roger federer more loss averse than serena williams using data from the high stakes 2013 dubai professional tennis tournament we find that compared with a tied score i male players have a higher serve speed and thus exhibit more effort when behind in score and their serve speeds get less sensitive to losses or gains when score difference gets too large and ii female players do not change their serve speed when behind while serving slower when ahead thus male players comply more with prospect theory exhibiting more loss aversion and reflection effect our results are robust to controlling for player fixed effects and characteristics with player random effects

discouragement effect and intermediate prizes in multi stage contests evidence from davis cup abstract the discouragement effect of being the lagging player in multi stage contests is a well documented phenomenon in this study we utilize data from 2447 davis cup matches in team tennis tournaments to test the effect of being behind or ahead on individuals performance with and without intermediate prizes using several different strategies to disentangle the effect of being ahead in the interim score from the effect of selection we find the usual discouragement effect however the discouragement effect disappears after the introduction of intermediate prizes in the form of ranking points the lagging favorite had close to a 20 percentage point greater probability of winning compared to matches without such a prize we show that this result is not driven by the selection of better players into tournaments with intermediate prizes as predicted by previous theoretical studies our empirical findings suggest that intermediate prizes may mitigate or even eliminate the ahead behind effects that arise in multi stage contests

intermediate information loss aversion and effort empirical evidence the present article empirically explores the impact of intermediate information on contestants effort data involving substituted soccer players of the german bundesliga indicate only weak evidence of a negative effect of ex ante heterogeneity on effort in contrast intermediate information measured by goal difference at the time of substitution significantly affects effort players exert the greatest effort when their team is leading by one goal and reduce their effort when it is trailing when intermediate information suggests the contest is already decided players from both teams reduce effort this behavior is in line with loss aversion such that players weight potential losses more than potential gains and adjust their effort accordingly jel z22 j41 m54

a response to glazer and rosenthal we are most grateful to glazer and rosenthal for the attention they have paid to our work abreu and matsushima 1992a b c in the process of criticizing our mechanism they have provided an elegant exposition of it which usefully supplements our own efforts the criticisms themselves we feel are misplaced and based on a close reading but narrow interpretation of our results glazer and rosenthal seek to show that in our mechanisms the iterative removal of strictly dominated strategies is or indeed ought to be controversial in terms of conventional decision theory the iterative logic is impeccable when iterative deletion leads to a unique profile that profile is the unique rationalizable profile the unique nash equilibrium and so on of course the logic of iterative dominance entails common knowledge of rationality the theoretical coherence of this assumption has been questioned in the context of backward programming in extensive form games see luce and raiffa 1957 pp 80 81 rosenthal 1981 basu 1988 reny 1992a 1992b bonanno 1991 binmore 1987a 1987b and gul 1989 among others these paradoxes of common knowledge of rationality have been highlighted in stylized examples such as the finitely repeated prisoners dilemma and rosenthal s centipede game which in fact has been a seminal inspiration for this recent literature 2 but our mechanisms are simultaneous there is no opportunity to demonstrate irrationality strategic or otherwise and therefore no scope to rationalize iteratively dominated behavior from a decision theory perspective the glazer and rosenthal critique might therefore be viewed as an elaborate revival of the indefensible claim that players in a one short prisoners dilemma will choose not to confess because they are both better off doing so than by both playing their dominant strategies within the standard game theory paradigm there is really nothing more to be said before turning to issues of bounded rationality we note that the glazer and rosenthal critique is essentially premised on the existence of a countervailing focal point but what is a focal point the notion is notoriously vague and we are aware of no widely accepted definition 3 this is not to deny that in very simple and particular games certain behavior may be focal frequently focalness is identified with a pareto dominating equilibrium and this is the point of view glazer and rosenthal seem to adopt 4 this is implicit in their acknowledgement that when the social choice function does satisfy pareto optimality our objection loses much of its immediate

is tomorrow another day the labor supply of new york city cabdrivers the labor supply of taxi drivers is consistent with the existence of intertemporal substitution my analysis of the stopping behavior of new york city cabdrivers shows that daily income effects are small and that the decision to stop work at a particular point on a given day is primarily related to cumulative daily hours to that point this is in contrast to the analysis of camerer et al who find that the daily wage elasticity of labor supply of new york city cabdrivers is substantially negative implying large daily income effects this difference in findings is due to important differences in empirical methods and to problems with the conception and measurement of the daily wage rate used by camerer et al

the dark side of sunshine regulatory oversight and status quo bias abstract as the mortgage foreclosure crisis accelerated in the u s in the late 2000s state level policymakers implemented measures designed to protect consumers and stem the tide of foreclosures one form of policy was simply to require lenders to report on foreclosure prevention activities such policies represented a shift from the status quo for mortgage loan servicing firms operating under incomplete information doing nothing with non paying loans while waiting for more information to be revealed to either foreclosing on the borrower or offering the borrower a modification of loan terms using a difference in difference in differences empirical strategy we exploit one policy implemented in maryland for a subset of mortgage servicers and find evidence that firms perform more loan modifications as well as file more foreclosures increasing foreclosure filings was contrary to the intent of the policy suggesting that policymakers should be aware of how firms exhibit systematic biases much like individuals

intertemporal incentives under loss aversion this paper studies the intertemporal allocation of incentives in a repeated moral hazard model with reference dependent preferences as in k oszegi and rabin 2009 besides consumption utility the agent experiences utility from the change in his beliefs about present and future eort and income when eort plans are rational the prospect of being disappointed by the outcome realization equals that of being pleasantly surprised and hence the loss averse agent is on net hurt by news in contrast to the prediction with classical preferences but consistent with real world contracts if consumption utility is not too concave and news about present income carries suciently larger weight in utility than news about future income a contract setting a current

goals and bracketing under mental accounting abstract behavioral economics struggles to explain why people sometimes evaluate outcomes separately narrow bracketing of mental accounts and sometimes jointly broad bracketing we develop a theory of endogenous bracketing where people set goals to tackle self control problems goals induce reference points that make substandard performance painful evaluating goals in a broadly bracketed mental account insulates an individual from exogenous risk of failure but because decisions or risks in different tasks become substitutes there are incentives to deviate from goals that are absent under narrow bracketing extensions include goal revision naivete about self control income targeting and firms bundling strategies

overconfidence and excess entry an experimental approach psychological studies show that most people are overconfident about their own relative abilities and unreasonably optimistic about their futures e g shelly e taylor and j d brown 1988 neil d weinstein 1980 when assessing their position in a distribution of peers on almost any positive trait like driving ability ola svenson 1981 income prospects or longevity a vast majority of people say they are above the average although of course only half can be if the trait is symmetrically distributed this paper explores whether optimistic biases could plausibly and predictably influence economic behavior in one particular setting entry into competitive games or markets many empirical studies show that most new businesses fail within a few years for example using plant level data from the u s census of manufacturers spanning 1963 1982 timothy dunne et al 1988 estimated that 61 5 percent of all entrants exited within five years and 79 6 percent exited within 10 years most of these exits are failures see also dunne et al 1989a 1989b d shapiro and r s khemani 1987

experiments with the pivot process for providing public goods interest in demand revealing mechanisms for providing public goods has both waned and then renewed over the past two decades the possibility of using such mechanisms in different venues than originally anticipated sparked the research reported here the specific motivation for this paper is to conduct a series of simple direct tests of one version of the class of mechanisms failure of demand revelation was much more expensive than we had expected even when compared to previous research with related mechanisms the reason for this remains an open question

de targeting advertising an assortment of products to loss averse consumers we consider product markets in which consumers are interested only in a specific product category and initially do not know which product category matches their tastes using sophisticated tracking technologies an intermediary can make inferences about a consumer s preferred product category and offer advertising firms the possibility to target their ads to match the consumer s taste such targeting reduces overall advertising costs and as a direct effect increases industry profits however as we show in this paper when consumers form reference prices and are loss averse more precise targeting may intensify competition between firms as a result firms may earn higher profits from de targeted advertising i e when the intermediary deliberately informs about some products and their price quotes from outside a consumer s preferred product category

a policy utility dislocation model based on prospect theory a case study of promoting policies with low carbon lifestyle abstract a low carbon lifestyle is an inevitable choice for mitigating climate change however in the actual situation where policy makers and policy target groups are separated from each other low carbon lifestyle changes are often manifested as individual strong government actions behind which social actions are seriously lagging based on this observation in this study a concept of policy utility dislocation was developed and a policy utility dislocation model was constructed based on prospect theory numerical simulation showed that policy utility dislocation can be reduced by increasing the proportion of residents environmental benefits government efforts and subsidies and reducing the cost of implementing a low carbon lifestyle for residents in particular when the environmental benefits of the government and residents accounted for 15 and 65 respectively or the subsidy coefficient was 2 the policy utility dislocation became zero in addition policy utility dislocation began to appear when the cost of implementing a low carbon lifestyle exceeded 3 this study enriches the connotation of policy utility and quantifies the policy utility dislocation and provides new ways to launch policies that promote low carbon lifestyles

goal setting and energy conservation abstract this paper develops a theoretical model of consumer demand for an energy conservation program that involves non binding self set goals we present evidence from a northern illinois goal setting program aimed at reducing residential electricity consumption which is difficult to reconcile with standard preferences and is broadly consistent with a model of present biased consumers with reference dependent preferences we find that the need for commitment is correlated with program adoption higher pre adoption consumption and lower responsiveness to goals consumers choosing realistic goals persistently save substantially more achieving savings of nearly 11 than those choosing very low or unrealistically high goals

loss aversion and competition in vickrey auctions money ain t no good we present results from an experiment with a within subject design aimed at testing a unique prediction of expectations based reference dependent preferences and loss aversion in private value second price vickrey auctions if bidders have expectationsbased reference dependent preferences the total number of participants in an auction should affect bids in auctions for real objects but not in auctions with induced monetary values our findings are consistent with expectations based reference dependent preferences and loss aversion in real object auctions subjects bids are affected by the number of competitors and on average they decline with the intensity of competition in induced value auctions instead bids are unaffected by the intensity of competition we also successfully replicate an experiment from sprenger 2015 aimed at distinguishing expectations based loss aversion from models of disappointment aversion this provides additional evidence that our findings in the auction experiments are due to expectations based loss aversion

labor supply of new york city cabdrivers one day at a time life cycle models of labor supply predict a positive relationship between hours supplied and transitory changes in wages because such changes have virtually no effect on life cycle wealth previous attempts to test this hypothesis empirically with time series data have not been supportive estimated elasticities are typically negative or nonsignificant such analyses however are vulnerable to measurement error and other estimation problems we use data on daily observations of wages and hours for new york city cab drivers to estimate the supply response to transitory fluctuations in wages cab drivers decide daily how many hours to supply and face wages that are positively correlated within days but largely uncorrelated between days using these data our central finding is that wage elasticities are persistently negative from 5 to 1 in three different samples even after correcting for measurement error using instrumental variables these negative wage elasticities challenge the notion that cab drivers trade off labor and leisure at different points in time and question the empirical adequacy of life cycle formulations of labor supply

your loss is my gain a recruitment experiment with framed incentives empirically labor contracts that financially penalize failure induce higher effort provision than economically identical contracts presented as paying a bonus for success an effect attributed to loss aversion this is puzzling as penalties are infrequently used in practice the most obvious explanation is selection loss averse agents are unwilling to accept such contracts i formalize this intuition then run an experiment to test it surprisingly i find that workers were 25 percent more likely to accept penalty contracts with no evidence of adverse or advantageous selection consistent with the existing literature penalty contracts also increased performance on the job by 0 2 standard deviations i outline extensions to the basic theory that are consistent with the main results but argue that more research is needed on the long term effects of penalty contracts if we want to understand why firms seem unwilling to use them

first in first win evidence on schedule effects in round robin tournaments in mega events the order of actions in contests may have a significant effect on performance in this study we examine the role of the schedule in round robin tournaments with sequential games between three and four contestants our empirical analysis based on soccer fifa world cups and uefa european championships and on two olympic wrestling events reveals that there is a substantial advantage to the contestant who competes in the first and third matches our findings are in line with the hypothesis that winning probabilities in multi stage contests with sequential games are endogenously depending on the schedule of contests as predicted by game theoretical models we also discuss possible ways to reduce the effect of the schedule

samurai accountant a theory of auditing and plunder a risk neutral principal wishes to exact a payment from a risk neutral agent whose wealth he does not know but may verify through a costly auditing procedure we characterize efficient schemes for the principal when he is allowed to choose schedules for preaudit and postaudit payments and audit probabilities subject to the constraint that only monetary incentives can be used and that the principal may never make a net payment to the agent the main results are that efficient schemes involve preaudit payments which are increasing in the agent s wealth audit probabilities are decreasing in the agent s wealth and also satisfy certain constraints as equalities in general such schemes involve stochastic auditing and rebates after an audit in this paper we analyse the problem of a principal extracting wealth from an agent who is reluctant to part with it and is also better informed than the principal as to the amount he owns we assume that the principal has a costly means of discovering the agent s

expectations as reference points field evidence from professional soccer we show that professional soccer players and their coaches exhibit reference dependent behavior during matches controlling for the state of the match and for unobserved heterogeneity we show on a minute by minute basis that players breach the rules of the game measured by the referee s assignment of cards significantly more often if their teams are behind the expected match outcome measured by preplay betting odds of large professional bookmakers we further show that coaches implement significantly more offensive substitutions if their teams are behind expectations both types of behaviors impair the expected ultimate match outcome of the team which shows that our findings do not simply reflect fully rational responses to reference dependent incentive schemes of favorite teams to falling behind we derive these results in a data set that contains more than 8 200 matches from 12 seasons of the german bundesliga and 12 seasons of the english premier league this paper was accepted by uri gneezy behavioral economics

goal setting and self control abstract this paper addresses the role of non binding goals to attenuate time inconsistency present biased agents have linear reference dependent preferences and endogenously set a goal that is the reference point they face an infinite horizon optimal stopping problem in continuous time when there is sufficient commitment to expectation based goals goal setting attenuates the present biased agent s tendency to stop too early and may even lead an agent to wait longer than the first best in particular reference dependence is strictly worse for a time consistent agent notably none of the effects of goal setting require loss aversion

cognitive performance in competitive environments evidence from a natural experiment competitive situations that involve cognitive performance are widespread in labor markets schools and organizations including test taking competition for promotion in firms and others this paper studies cognitive performance in a high stakes competitive environment the analysis takes advantage of a natural experiment that randomly allocates different emotional states across professional subjects competing in a cognitive task the setting is a chess match where two players play an even number of chess games against each other alternating the color of the pieces white pieces confer an advantage for winning a chess game and who starts the match with these pieces is randomly decided the theoretical analysis shows that in this setting there is no rational reason why winning frequencies should be better than 50 50 in favor of the player drawing the white pieces in the first game yet we find that observed frequencies are about 60 40 differences in performance are also stronger when the competing subjects are more similar in cognitive skills we conclude that the evidence is consistent with the hypothesis that psychological elements affect cognitive performance in the face of experience competition and high stakes

do people anticipate loss aversion there is growing interest in the use of loss contracts that offer performance incentives as up front payments that employees can lose standard behavioral models predict a trade off in the use of loss contracts employees will work harder under loss contracts than under gain contracts but anticipating loss aversion they will prefer gain contracts to loss contracts in a series of experiments we test these predictions by measuring performance and preferences for payoff equivalent gain and loss contracts we find that people indeed work harder under loss than gain contracts as the theory predicts surprisingly rather than a preference for the gain contract we find that people actually prefer loss contracts in exploring mechanisms for our results we find suggestive evidence that people do anticipate loss aversion but select into loss contracts as a commitment device to improve performance using one bias loss aversion to address another dynamic inconsistency data as supplemental material are a

endowment effects in the field evidence from india s ipo lotteries we study a unique field experiment in india in which 1 5 million stock investors face lotteries for the random allocation of shares we find that the winners of these randomly assigned initial public offering ipo lottery shares are significantly more likely to hold them than lottery losers 1 6 and even 24 months after the random allocation this finding strongly evokes laboratory findings of an endowment effect for risky gambles and persists in samples of highly active investors suggesting along with additional evidence that this behaviour is not driven by inertia alone the effect decreases as experience in the ipo market increases but remains even for very experienced investors leading theories of the endowment effect based on reference dependent preferences are unable to fully explain these and other findings in the data