Affiliation:
1. Department of Economics, Harvard University (email: )
2. Bogen Family Department of Economics and Federmann Center for the Study of Rationality, Hebrew University of Jerusalem; S. C. Johnson Graduate School of Management, Cornell University; and NBER (email: )
3. Department of Economics and Business School, Harvard University (email: )
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. (JEL D11, D82, D91)
Publisher
American Economic Association
Subject
General Economics, Econometrics and Finance
Cited by
10 articles.
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