School Choice and Loss Aversion

Evidence suggests that participants in direct student-proposing deferred-acceptance mechanisms (DSPDA) play dominated strategies. To explain the observed data, we introduce expectation-based loss aversion into a school-choice setting and characterize choice-acclimating personal equilibria in DSPDA. We find that non-truthful preference submissions can be strictly optimal if and only if they are top-choice monotone. In equilibrium, DSPDA may implement allocations with justified envy. Specifically, it discriminates against students who are more loss averse or less con- fident than their peers, and amplifies already existing discrimination. To level the playing field, we propose sequential mechanisms as an alternative that is robust to these biases.