We test whether risk attitudes change when losses instead of gains are
involved. The study of gain-loss asymmetries has been largely confined
to reflected choices, where all the money amounts of a positive
prospect are multiplied by minus one. We define the decomposition
reflection = translation + probability switch, and experimentally find
both a translation effect (risk attraction becomes more frequent when
gains are translated into losses) and a probability switch effect (risk
attraction ...
We test whether risk attitudes change when losses instead of gains are
involved. The study of gain-loss asymmetries has been largely confined
to reflected choices, where all the money amounts of a positive
prospect are multiplied by minus one. We define the decomposition
reflection = translation + probability switch, and experimentally find
both a translation effect (risk attraction becomes more frequent when
gains are translated into losses) and a probability switch effect (risk
attraction becomes more frequent when the probability of the best outcome
decreases). Surprisingly, the switch effect is somewhat stronger than the
translation effect, negating a conventional reflection effect when one
starts with choices between gains with a low probability of the best
outcome. We conclude by arguing that, while both the translation effect
and the switch effect contradict the expected utility hypothesis, the
translation effect implies a deeper violation of standard preference theory.
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