Bang for the buck:gain-loss ratio as a driver of judgment and choice

De Langhe, Bart and Puntoni, Stefano (2015) Bang for the buck:gain-loss ratio as a driver of judgment and choice. Management Science, 61 (5). pp. 1137-1163. ISSN 0025-1909

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Prominent decision-making theories propose that individuals (should) evaluate alternatives by combining gains and losses in an additive way. Instead, we suggest that individuals seek to maximize the rate of exchange between positive and negative outcomes and thus combine gains and losses in a multiplicative way. Sensitivity to gain-loss ratio provides an alternative account for several existing findings and implies a number of novel predictions. It implies greater sensitivity to losses and risk aversion when expected value is positive, but greater sensitivity to gains and risk seeking when expected value is negative. It also implies more extreme preferences when expected value is positive than when expected value is negative. These predictions are independent of decreasing marginal sensitivity, loss aversion, and probability weighting—three key properties of prospect theory. Five new experiments and reanalyses of two recently published studies support these predictions.

Item Type:
Journal Article
Journal or Publication Title:
Management Science
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Date of Acceptance: 26/06/2014
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Deposited On:
15 Apr 2015 08:20
Last Modified:
22 Nov 2022 01:40