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

Eyal Ert, Ido Erev*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

72 Scopus citations

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.

Original languageAmerican English
Pages (from-to)715-723
Number of pages9
JournalJournal of Economic Psychology
Volume29
Issue number5
DOIs
StatePublished - Nov 2008
Externally publishedYes

Bibliographical note

Funding Information:
This research was supported by a grant from Israel Science Foundation, and benefited from comments from Shahar Ayal, and the participants of the “International Conference on Affect, Motivation and Decision Making” Ein Boqeq, Israel, December 2006. We thank Dana Dahan for help in data collection. We also would like to thank the editor and an anonymous reviewer for their constructive comments.

Keywords

  • Framing
  • Market for lemons
  • Omission bias
  • Prospect theory
  • Quality uncertainty
  • Status quo bias

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