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The rejection of attractive gambles, loss aversion, and the lemon avoidance heuristic

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  • Ert, Eyal
  • Erev, Ido

Abstract

Previous studies of mixed gambles (gambles that yield gains and losses) reveal mixed results. Whereas some studies show a tendency to reject highly attractive mixed gambles, other studies show indifference between mixed gambles with an expected value of 0 and the status quo. The current paper presents three studies that explore this discrepancy. The results highlight a strong sensitivity to the format and the context of the choice task. People tend to reject attractive mixed gambles when they are asked to decide whether to accept them, but tend to prefer these gambles over a sure payoff of 0 in a choice task. The tendency to reject mixed gambles is larger in a response to a hallway questionnaire than in the laboratory. This pattern can be summarized with the assertion that people behave as if they use a "lemon avoidance heuristic" that can be described as an intuitive implementation of SPAM killer techniques.

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  • Ert, Eyal & Erev, Ido, 2008. "The rejection of attractive gambles, loss aversion, and the lemon avoidance heuristic," Journal of Economic Psychology, Elsevier, vol. 29(5), pages 715-723, November.
    • Handle: RePEc:eee:joepsy:v:29:y:2008:i:5:p:715-723
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