Paper #640

Title:

Reflections on gains and losses: A 2x2x7 experiment

Authors:

Antoni Bosch-Domènech and Joaquim Silvestre

Date:

September 2002 (Revised: February 2005)

Abstract:

We test whether risk attitudes change when losses instead of gains are involved. The study of gain-loss asymmetries has been largely confined to “reflected” choices, where all the money amounts of a positive prospect are multiplied by minus one. We define the decomposition “reflection = translation + probability switch,” and experimentally find both a translation effect (risk attraction becomes more frequent when gains are translated into losses) and a probability switch effect (risk attraction becomes more frequent when the probability of the best outcome decreases). Surprisingly, the switch effect is somewhat stronger than the translation effect, negating a conventional reflection effect when one starts with choices between gains with a low probability of the best outcome. We conclude by arguing that, while both the translation effect and the switch effect contradict the expected utility hypothesis, the translation effect implies a deeper violation of standard preference theory.

Keywords:

Reflection effect, risk attraction, risk aversion, gains, losses, experiments, Leex

JEL codes:

C91, D81

Area of Research:

Behavioral and Experimental Economics / Microeconomics

Published in:

Journal of Risk and Uncertainty, 33, 3, 2006

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