Expectations-Based Loss Aversion May Help Explain Seemingly Dominated Choices in Strategy-Proof Mechanisms

Bnaya Dreyfuss*, Ori Heffetz, Matthew Rabin

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

12 Scopus citations

Abstract

Deferred acceptance (DA), a widely implemented algorithm, is meant to improve allocations: under classical preferences, it induces preference-concordant rankings. However, recent evidence shows that—in both real, large-stakes applications and experiments—participants frequently play seemingly dominated, significantly costly strategies that avoid small chances of good outcomes. We show theoretically why, with expectations-based loss aversion, this behavior may be partly intentional. Reanalyzing existing experimental data on random serial dictatorship (a restriction of DA), we show that such reference-dependent preferences, with a degree and distribution of loss aversion that explain common levels of risk aversion elsewhere, fit the data better than no-loss-aversion preferences.

Original languageAmerican English
Pages (from-to)515-555
Number of pages41
JournalAmerican Economic Journal: Microeconomics
Volume14
Issue number4
DOIs
StatePublished - 2022

Bibliographical note

Publisher Copyright:
© 2022, American Economic Journal: Microeconomics. All Rights Reserved.

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