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The psychology of prizes: Loss aversion and optimal tournament rewards

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  • Dmitry Ryvkin
  • Qin Wu

Abstract

We study the optimal allocation of prizes in rank-order tournaments with loss averse agents. Prize sharing becomes increasingly optimal with loss aversion because more equitable prizes reduce the marginal psychological cost of anticipated losses. Furthermore, loss aversion can boost effort if prizes are sufficiently equitable, but otherwise effort declines with loss aversion. Overall, these results give credence to more equitable allocations of competitive rewards. A win-win scenario is where optimal prizes are equitable even under loss neutrality, in which case the principal benefits from agents' loss aversion.

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  • Dmitry Ryvkin & Qin Wu, 2024. "The psychology of prizes: Loss aversion and optimal tournament rewards," Papers 2411.01068, arXiv.org.
    • Handle: RePEc:arx:papers:2411.01068
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    File URL: http://arxiv.org/pdf/2411.01068
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    References listed on IDEAS

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