Document Type
Article
Publication Date
9-14-2024
Abstract
A robust finding in managerial accounting research is that participants prefer contracts framed as bonuses to economically equivalent contracts framed as penalties. Another finding is that participants put forth more effort when facing penalty contracts than equivalent bonus contracts. Both results are commonly described as due to loss aversion, an integral portion of prospect theory. We test whether loss aversion is correlated with higher effort in an experiment with two parts. In the first part, we elicit individual participants' loss aversion using two measures. In the second part of the experiment, participants choose costly effort to increase the likelihood of high versus low state-contingent payoffs framed as bonuses or penalties. We find significant differences in the effort chosen between treatments: participants put in significantly more effort when facing penalty contracts. However, we find no evidence that the degree of loss aversion from either measure correlates with effort choices as predicted by prospect theory. We find that only a quarter of participants display behavior consistent with the prospect theory, and for those, we see little evidence of the commonly cited features of loss aversion. While the most cited reason for the framing of incentives changing participant behavior is loss aversion, our results suggest that this reason is falsified. While the results from prior studies are replicable, the untested underlying mechanism is not loss aversion.
Recommended Citation
Shields, T., & Wilhelm, J. (2024). A critical evaluation of loss aversion as the determinate of effort in compensation framing. ESI Working Paper 24-14. https://digitalcommons.chapman.edu/esi_working_papers/410/
Comments
ESI Working Paper 24-14