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An experimental test of loss aversion and scale compatibility;
Loss Aversion and Scale Compatibility in Two-Attributive Trade-Offs
Bleichrodt, Han; Pinto, José Luis
Universitat Pompeu Fabra. Departament d'Economia i Empresa
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.
2005-09-15
Microeconomics
decision analysis
utility theory
loss aversion
scale compatibility
health
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