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Further reflections on the reflection effect

Risk Aversion in Experiments

ISBN: 978-0-7623-1384-6, eISBN: 978-1-84950-547-5

ISSN: 0193-2306

Publication date: 3 June 2008

Abstract

This paper reports a new experimental test of the notion that behavior switches from risk averse to risk seeking when gains are “reflected” into the loss domain. We conduct a sequence of experiments that allows us to directly compare choices under reflected gains and losses where real and hypothetical payoffs range from several dollars to over $100. Lotteries with positive payoffs are transformed into lotteries over losses by multiplying all payoffs by –1, that is, by reflecting payoffs around zero. When we use hypothetical payments, more than half of the subjects who are risk averse for gains turn out to be risk seeking for losses. This reflection effect is diminished considerably with cash payoffs, where the modal choice pattern is to exhibit risk aversion for both gains and losses. However, we do observe a significant difference in risk attitudes between losses (where most subjects are approximately risk neutral) and gains (where most subjects are risk averse). Reflection rates are further reduced when payoffs are scaled up by a factor of 15 (for both real and hypothetical payoffs).

Citation

Laury, S.K. and Holt, C.A. (2008), "Further reflections on the reflection effect", Cox, J.C. and Harrison, G.W. (Ed.) Risk Aversion in Experiments (Research in Experimental Economics, Vol. 12), Emerald Group Publishing Limited, Bingley, pp. 405-440. https://doi.org/10.1016/S0193-2306(08)00009-4

Publisher

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Emerald Group Publishing Limited

Copyright © 2008, Emerald Group Publishing Limited