Bang for the buck: Gain-loss ratio as a driver of judgment and choice
De Langhe, Bart Puntoni, Stefano
De Langhe, Bart
Puntoni, Stefano
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Publication Type
Journal article with impact factor
Editor
Supervisor
Publication Year
2015
Journal
Management Science
Book
Publication Volume
61
Publication Issue
5
Publication Begin page
1137
Publication End page
1163
Publication NUmber of pages
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Abstract
Prominent decision-making theories propose that individuals (should) evaluate alternatives by combining gains and losses in an additive way. Instead, we suggest that individuals seek to maximize the rate of exchange between positive and negative outcomes and thus combine gains and losses in a multiplicative way. Sensitivity to gain-loss ratio provides an alternative account for several existing findings and implies a number of novel predictions. It implies greater sensitivity to losses and risk aversion when expected value is positive, but greater sensitivity to gains and risk seeking when expected value is negative. It also implies more extreme preferences when expected value is positive than when expected value is negative. These predictions are independent of decreasing marginal sensitivity, loss aversion, and probability weighting--three key properties of prospect theory. Five new experiments and reanalyses of two recently published studies support these predictions.
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Keywords
Judgment (Psychology), Theory of Knowledge, Choice (Psychology), Psychology, Loss Aversion, Decreasing Marginal Sensitivity, Efficiency, Gain-Loss Ratio, Loss Aversion, Mixed Gambles, Probability Weighting, Prospect Theory, Risk Preference