UC San Diego

This dissertation explores the interplay between heterogeneity in gain-loss attitudes and a leading model of expectations-based reference dependence (Koszegi and Rabin, 2006, 2007) (KR). Reference-dependent preferences posit that individuals consider how outcomes differ from some reference point (e.g. the status quo or an expectation) rather than evaluating the outcomes in isolation; these models have helped rationalize a number of empirical regularities inconsistent with neoclassical theories in economics.

Since the development of this KR expectations-based mechanism, a number of studies have sought to test the comparative static predictions in the exchange (Ericson and Fuster, 2011; Goette, Harms, et al., 2016; Heffetz and List, 2014) and labor supply (Abeler et al., 2011; Gneezy et al., 2017) contexts. The mixed experimental results initially cast doubt on KR’s ability to predict behavior. Importantly, these tests were all conducted under an implicit assumption of universal loss aversion – that individuals weight losses below the reference point more than gains above. Recent work, however, documents a substantial fraction of gain-lovers (Chapman, Snowberg, et al., 2018), meaning these experiments were incidentally testing a joint hypothesis of the KR model and loss aversion.

Throughout these chapters, experiments are specifically designed to overcome this potential confound by measuring gain-loss attitudes in a first stage and relating these measures to theoretical predictions in a second stage. The results provide evidence in support of the KR predictions after accounting for this underlying heterogeneity. Moreover, a Bayesian re-analysis of the exchange experiments suggests that a highly heterogeneous distribution of gain-loss attitudes best rationalizes the mixed results, with an estimated posterior indicating 35% to 55% of participants to be gain-loving.