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Reflections on gains and losses: A 2x2x7 experiment

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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.

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Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 640.

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Date of creation: Sep 2002
Date of revision: Feb 2005
Handle: RePEc:upf:upfgen:640

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Web page: http://www.econ.upf.edu/

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Keywords: Reflection effect; risk attraction; risk aversion; gains; losses; experiments; Leex;

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  8. Bosch-Domenech, Antoni & Silvestre, Joaquim, 1999. "Does risk aversion or attraction depend on income? An experiment," Economics Letters, Elsevier, vol. 65(3), pages 265-273, December.
  9. Harry Markowitz, 1952. "The Utility of Wealth," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 60, pages 151.
  10. Antoni Bosch-Domènech & Joaquim Silvestre, 2003. "Do the eealthy risk more money? An experimental comparison," Economics Working Papers 692, Department of Economics and Business, Universitat Pompeu Fabra, revised Jan 2005.
  11. Keasey, Kevin & Moon, Philip, 1996. "Gambling with the house money in capital expenditure decisions: An experimental analysis," Economics Letters, Elsevier, vol. 50(1), pages 105-110, January.
  12. William Harbaugh & Kate Krause & Lise Vesterlund, 2002. "Risk attitudes of children and adults: Choices over small and large probability gains and losses," Artefactual Field Experiments 00055, The Field Experiments Website.
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  16. Susan K. Laury & Charles A. Holt, 2005. "Further Reflections on Prospect Theory," Experimental Economics Center Working Paper Series, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University 2006-23, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University.
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Cited by:
  1. Chakravarty, Sugato & Jain, Pankaj & Upson, James & Wood, Robert, 2012. "Clean Sweep: Informed Trading through Intermarket Sweep Orders," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 47(02), pages 415-435, April.
  2. Antoni Bosch-Domènech & Joaquim Silvestre, 2003. "Do the eealthy risk more money? An experimental comparison," Economics Working Papers 692, Department of Economics and Business, Universitat Pompeu Fabra, revised Jan 2005.
  3. Bosch-Domènech, Antoni & Silvestre, Joaquim, 2010. "Averting risk in the face of large losses: Bernoulli vs. Tversky and Kahneman," Economics Letters, Elsevier, vol. 107(2), pages 180-182, May.
  4. Antoni Bosch-Domènech & Joaquim Silvestre, 2006. "Risk aversion and embedding bias," Economics Working Papers 934, Department of Economics and Business, Universitat Pompeu Fabra.
  5. Antoni Bosch & Joaquim Silvestre, 2003. "Do the Wealthy Risk More Money? An Experimental Comparison," Working Papers 10, Barcelona Graduate School of Economics.
  6. De Giorgi, Enrico & Hens, Thorsten & Post, Thierry, 2005. "Prospect Theory and the Size and Value Premium Puzzles," Discussion Papers 2005/20, Department of Business and Management Science, Norwegian School of Economics.
  7. Rick Harbaugh, 2005. "Prospect Theory or Skill Signaling?," Working Papers, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy 2005-06, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.

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