Faculty of Economics and Business Administration Publications Database

Expectation-based loss aversion and rank-order tournaments

Dato, Simon
Müller, Daniel
Volume: 66
Number: 4
Pages: 901 - 928
ISSN-Print: 0938-2259
Link External Source: Online Version
Year: 2018
Keywords: Expectation-based loss aversion; Rank-order tournament; Reference-dependent preferences

Many insights regarding rank-order tournaments rest upon contestants’ behavior in symmetric equilibria. As shown by Gill and Stone (Games Econ Behav 69:346–364, 2010), however, symmetric equilibria may not exist if contestants are expectation-based loss averse and have choice-acclimating expectations. We show that under choice-unacclimating—i.e., fixed—expectations both symmetric and asymmetric equilibria exist for all degrees of loss aversion. Importantly, a symmetric equilibrium also exists if players follow their preferred credible plan and the weight attached to psychological gain–loss utility does not strongly outweigh the weight put on material utility. Hence, for fixed expectations a focus on symmetric equilibria seems justifiable even if contestants are expectation-based loss averse.