Reflections on gains and losses: A 2x2x7 experiment

We test whether risk attitudes change when losses instead of gains are involved. The study of gain-loss asymmetries has been largely confined to “reflected” choices, where all the money amounts of a positive prospect are multiplied by minus one. We define the decomposition “reflection = translation + probability switch,” and experimentally find both a translation effect (risk attraction becomes more frequent when gains are translated into losses) and a probability switch effect (risk attraction becomes more frequent when the probability of the best outcome decreases). Surprisingly, the switch effect is somewhat stronger than the translation effect, negating a conventional reflection effect when one starts with choices between gains with a low probability of the best outcome. We conclude by arguing that, while both the translation effect and the switch effect contradict the expected utility hypothesis, the translation effect implies a deeper violation of standard preference theory.