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An experimental test of loss aversion and scale compatibility

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  • Han Bleichrodt
  • José Luis Pinto

Abstract

This paper studies two important reasons why people violate procedure invariance, loss aversion and scale compatibility. The paper extends previous research on loss aversion and scale compatibility by studying loss aversion and scale compatibility simultaneously, by looking at a new decision domain, medical decision analysis, and by examining the effect of loss aversion and scale compatibility on "well-contemplated preferences." We find significant evidence both of loss aversion and scale compatibility. However, the sizes of the biases due to loss aversion and scale compatibility vary over trade-offs and most participants do not behave consistently according to loss aversion or scale compatibility. In particular, the effect of loss aversion in medical trade-offs decreases with duration. These findings are encouraging for utility measurement and prescriptive decision analysis. There appear to exist decision contexts in which the effects of loss aversion and scale compatibility can be minimized and utilities can be measured that do not suffer from these distorting factors.

Suggested Citation

  • Han Bleichrodt & José Luis Pinto, 2000. "An experimental test of loss aversion and scale compatibility," Working Papers, Research Center on Health and Economics 467, Department of Economics and Business, Universitat Pompeu Fabra.
    • Handle: RePEc:upf:upfses:467
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    More about this item

    Keywords

    Decision analysis; utility theory; loss aversion; scale compatibility; health;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • I10 - Health, Education, and Welfare - - Health - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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