Predictive powers of tests of risk and loss Aversion in a principal-agent context: an Experiment

The goal of this experimental study is to demonstrate that the test of loss-aversion has a superior predictive power than the standard test of risk-aversion over behavior in risky situations that involve potential losses, e.g. agent's decision in a principal-agent context. Since participant's loss-aversion and risk-aversion affect the results of the loss-aversion test in one direction, the results of that test contains combined information on agent's preferences regarding risks and losses. On the other hand, test of risk- aversion only reflects the attitude towards risks and becomes redundant for prediction of agent's behavior in principal-agent setting when test of loss-aversion is conducted. A three-stage experiment consisted of eliciting a proxy for the curvature of agent's utility curve over wealth, eliciting a proxy for the loss-aversion of an agent, and eliciting the willingness of an agent to take a costly action for an uncertain reward

English versus Vickrey Auctions with Loss Averse Bidders

Evidence suggests that people evaluate outcomes relative to expectations. I analyze this expectation-based loss aversion [Köszegi and Rabin (2006, 2009)] in the context of dynamic and static auctions, where the reference point is given by the (endogenous) equilibrium outcome. If agents update their reference point during the auction, the arrival of information crucially affects equilibrium behavior. Consequently, I show that- even with independent private values|the Vickrey auction yields strictly higher revenue than the English auction, violating the well known revenue equivalence. Thus, dynamic loss aversion o ers a novel explanation for empirically observed differences between these auction formats