The favorite-longshot bias describes the longstanding empirical regularity that betting odds provide biased estimates of the probability of a horse winning - longshots are overbet, while favorites are underbet. Neoclassical explanations of this phenomenon focus on rational gamblers who overbet...

This paper reports results from a classroom dictator game comparing the effects of three different sets of standard instructions. The results show that seemingly small differences in instructions induce fundamentally different perceptions regarding entitlement. Behavior is affected accordingly,...

We show that professional soccer players exhibit reference-dependent behavior during matches. Controlling for the state of the match and for unobserved heterogeneity, we show on a minute-by-minute basis that a player breaches the rules of the game, measured by the referee's assignment of cards,...

This paper examines the measurement of social welfare, poverty and inequality taking into account reference-dependence, loss aversion and diminishing sensitivity — aspects emphasized in Prospect Theory — to social welfare measurement. We suggest a new notion of equivalent income, the income...

We propose a theory of ex post inefficient renegotiation that is based on loss aversion. When two parties write a long-term contract that has to be renegotiated after the realization of the state of the world, they take the initial contract as a reference point to which they compare gains and...

There is growing interest in the use of loss contracts that offer performance incentives as upfront payments that employees can lose. Standard behavioral models predict a tradeoff in the use of loss contracts: employees will work harder under loss contracts than under gain contracts; but,...

For the procurement of complex goods the early exchange of information is important to avoid costly renegotiation ex post. We show that this is achieved by bilateral negotiations but not by auctions. Negotiations strictly outperforms auctions if sellers are likely to have superior information...