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Reflections on gains and losses: A 2x2x7 experiment

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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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
Contact details of provider: Web page: http://www.econ.upf.edu/

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  13. William Harbaugh & Kate Krause & Lise Vesterlund, 2002. "Risk Attitudes of Children and Adults: Choices Over Small and Large Probability Gains and Losses," Experimental Economics, Springer;Economic Science Association, vol. 5(1), pages 53-84, June.
  14. Susan K. Laury & Charles A. Holt, 2005. "Further Reflections on Prospect Theory," Experimental Economics Center Working Paper Series 2006-23, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University.
  15. Antoni Bosch & Joaquim Silvestre, 2003. "Do the Wealthy Risk More Money? An Experimental Comparison," Working Papers 10, Barcelona Graduate School of Economics.
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