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

Author

Listed:
  • Bnaya Dreyfuss
  • Ori Heffetz
  • Matthew Rabin
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.

Suggested Citation

  • Bnaya Dreyfuss & Ori Heffetz & Matthew Rabin, 2019. "Expectations-Based Loss Aversion May Help Explain Seemingly Dominated Choices in Strategy-Proof Mechanisms," NBER Working Papers 26394, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:26394
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Jean-Michel Benkert, 2015. "Bilateral trade with loss-averse agents," ECON - Working Papers 188, Department of Economics - University of Zurich, revised Jul 2022.
    2. Heiko Karle & Heiner Schumacher & Rune Vølund, 2020. "Consumer search and the uncertainty effect," Working Papers of Department of Economics, Leuven 657766, KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven.
    3. Andrew Kloosterman & Peter Troyan, 2023. "Rankings-Dependent Preferences: A Real Goods Matching Experiment," Papers 2305.03644, arXiv.org, revised Aug 2024.
    4. Vincent Meisner & Jonas von Wangenheim, 2022. "Loss aversion in strategy-proof school-choice mechanisms," Papers 2207.14666, arXiv.org.
    5. Alex Rees-Jones & Ran Shorrer & Chloe J. Tergiman, 2020. "Correlation Neglect in Student-to-School Matching," NBER Working Papers 26734, National Bureau of Economic Research, Inc.
    6. Kohei Daido & Tomoya Tajika, 2022. "Impact of Information Concerning the Popularity of Candidates on Loss-Averse Voters’ Abstention," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 10(1), pages 41-51, May.
    7. Meisner, Vincent, 2021. "Report-Dependent Utility and Strategy-Proofness," Rationality and Competition Discussion Paper Series 289, CRC TRR 190 Rationality and Competition.
    8. Kohei Daido & Tomoya Tajika, 2020. "Abstention by Loss-Averse Voters," Discussion Paper Series 205, School of Economics, Kwansei Gakuin University.
    9. Meisner, Vincent & von Wangenheim, Jonas, 2019. "School Choice and Loss Aversion," Rationality and Competition Discussion Paper Series 208, CRC TRR 190 Rationality and Competition.
    10. Natsumi Shimada, 2022. "An experimental study on strategic preference formation in two-sided matching markets," ISER Discussion Paper 1169, Institute of Social and Economic Research, Osaka University.
    11. Hakimov, Rustamdjan & Kübler, Dorothea, 2021. "Experiments on centralized school choice and college admissions: a survey," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 24(2), pages 434-488.
    12. Vincent Meisner, 2023. "Report-Dependent Utility and Strategy-Proofness," Management Science, INFORMS, vol. 69(5), pages 2733-2745, May.
    13. Zhang, Jun, 2021. "Level-k reasoning in school choice," Games and Economic Behavior, Elsevier, vol. 128(C), pages 1-17.
    14. Georgy Artemov & Yeon-Koo Che & YingHua He, 2023. "Stable Matching with Mistaken Agents," Journal of Political Economy Microeconomics, University of Chicago Press, vol. 1(2), pages 270-320.
    15. Yves Breitmoser & Sebastian Schweighofer-Kodritsch, 2022. "Obviousness around the clock," Experimental Economics, Springer;Economic Science Association, vol. 25(2), pages 483-513, April.

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    More about this item

    JEL classification:

    • B49 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Other
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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