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Journal of Undergraduate Research

Keywords

loss aversion, consumption bundle, ballot initiative, same sex marriage

College

Family, Home, and Social Sciences

Department

Economics

Abstract

There is a vast body of literature that documents the seemingly irrational phenomena called loss aversion, a subset of prospect theory. Loss aversion is the idea that losses loom larger than otherwise equivalent gains, making it so that an agent would be unwilling to give up something currently in their consumption bundle for something else not currently in their consumption bundle, even though in the absence of both goods and faced with the choice between the two the agent would be indifferent between the two goods. Loss aversion has been shown to be responsible for irrational behavior in a variety of settings, some of them with extremely high stakes such as the PGA tour. Although the effects of loss aversion are well documented when the losses are internal, to my knowledge there are no studies that document if loss aversion is present when one is acting as an agent for another. In the real world we are given many opportunities to act as agents for others, and so if loss averse behavior exists in such situations it might be wise to set up an incentive structure for the agent so that the effects of loss aversion are mitigated. One salient example of being an agent for others are ballot initiatives such as whether or not to permit something like gay marriage because the vast majority of the population is not directly affected by the outcome, but is asked to act as an agent for others in making decisions. The inspiration for the project came from California’s Prop 8 (2008) that sparked controversy over the change in wording. Originally the wording presented the issue without a status quo. The attorney general changed the wording of the ballot measure so that it highlighted the fact that a right was being eliminated, and thereby saying that the status quo was that the right was already granted, which was true, but only in a limited number of municipalities in the state. We wanted to see if such wording changes mattered.

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