Loss Aversion and Scale Compatibility in Two-Attribute Trade-Offs

This paper studies two important explanations of why people violate procedure invariance: loss aversion and scale compatibility. The paper extends previous research by studying loss aversion and scale compatibility simultaneously and in a quantitative manner, by looking at a new decision domain, medical decision making, and by using an experimental design that is less conducive to violations of procedure invariance. We find significant evidence both of loss aversion and of scale compatibility. The effects of loss aversion and scale compatibility are not constant but vary over trade-offs and most participants do not behave consistently according to loss aversion or scale compatibility. In particular, the effect of loss aversion in medical trade-offs decreases with life duration. The rejection of constant loss aversion and constant scale compatibility is discouraging for attempts to model loss aversion and scale compatibility. The findings are encouraging for utility measurement and prescriptive decision analysis that seeks to avoid the effects of loss aversion and scale compatibility. The data suggest that there exist decision contexts in which the effects of loss aversion and scale compatibility can be minimized and that utilities can be measured that are unaffected by their impact.

• View at Publisher
• View at Scopus
• View at Web of Science