Heterogeneity of Gain-Loss Attitudes and Expectations-Based Reference Points

By: Lorenz Goette, Thomas Graeber, Alex Kellogg and Charles Sprenger

Format:Print
| Language:English

Abstract

We examine the role of heterogeneity in gain-loss attitudes for identifying the leading behavioral model of expectations-based reference dependence (Kőszegi and Rabin, 2006, 2007) (KR). Failure to account for recently-documented heterogeneity in gain-loss attitudes is a central confounding factor challenging prior tests of KR, all conducted under the assumption of universal loss aversion. We implement a two-stage experimental design to first measure gain-loss attitudes, and, second, examine heterogeneous treatment effects over these attitudes in an exchange paradigm common to prior tests of KR. In both an initial experiment and an exact replication, we document the heterogeneous treatment effects over gain-loss attitudes predicted by the model. These findings provide foundational support for the KR model’s expectations-based mechanism and explain inconsistencies in prior empirical exercises conducted under the assumption of homogeneous loss aversion.