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The rejection of attractive gambles, loss aversion, and the lemon avoidance heuristic

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  • Ert, Eyal
  • Erev, Ido

Abstract

Previous studies of mixed gambles (gambles that yield gains and losses) reveal mixed results. Whereas some studies show a tendency to reject highly attractive mixed gambles, other studies show indifference between mixed gambles with an expected value of 0 and the status quo. The current paper presents three studies that explore this discrepancy. The results highlight a strong sensitivity to the format and the context of the choice task. People tend to reject attractive mixed gambles when they are asked to decide whether to accept them, but tend to prefer these gambles over a sure payoff of 0 in a choice task. The tendency to reject mixed gambles is larger in a response to a hallway questionnaire than in the laboratory. This pattern can be summarized with the assertion that people behave as if they use a "lemon avoidance heuristic" that can be described as an intuitive implementation of SPAM killer techniques.

Suggested Citation

  • Ert, Eyal & Erev, Ido, 2008. "The rejection of attractive gambles, loss aversion, and the lemon avoidance heuristic," Journal of Economic Psychology, Elsevier, vol. 29(5), pages 715-723, November.
    • Handle: RePEc:eee:joepsy:v:29:y:2008:i:5:p:715-723
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    7. Feess, Eberhard & Müller, Helge & Schumacher, Christoph, 2016. "Estimating risk preferences of bettors with different bet sizes," European Journal of Operational Research, Elsevier, vol. 249(3), pages 1102-1112.
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    16. Lazar, Maya & Levkowitz, Amir & Oren, Amit & Sonsino, Doron, 2017. "A note on receptiveness to loss in structured Investment," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 69(C), pages 92-98.
    17. (Xiao-Tian) Wang, X.T. & Ong, Lay See & Tan, Jolene H., 2015. "Sense and sensibility of ownership: Type of ownership experience and valuation of goods," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 58(C), pages 171-177.
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    19. Avineri, Erel, 2012. "On the use and potential of behavioural economics from the perspective of transport and climate change," Journal of Transport Geography, Elsevier, vol. 24(C), pages 512-521.
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