Do People Anticipate Loss Aversion?

There is growing interest in the use of loss contracts that offer performance incentives as upfront payments that employees can lose. Standard behavioral models predict a tradeoff in the use of loss contracts: employees will work harder under loss contracts than under gain contracts; but, anticipating loss aversion, they will prefer gain contracts to loss contracts. In a series of experiments, we test these predictions by measuring performance and preferences for payoff-equivalent gain and loss contracts. We find that people indeed work harder under loss than gain contracts, as the theory predicts. Surprisingly, rather than a preference for the gain contract, we find that people actually prefer loss contracts. In exploring mechanisms for our results, we find suggestive evidence that people do anticipate loss aversion but select into loss contracts as a commitment device to improve performance. ∗Affiliations: Imas: Carnegie Mellon University and University of California San Diego; Sadoff: University of California San Diego; Samek: University of Southern California. We thank Christa Gibbs and Stephanie Schwartz for providing truly outstanding research assistance. This research has been conducted with IRB approval. Please direct correspondence to Sally Sadoff.