THE APPROPRIATE CHOICE OF VALUATION MEASURE IN USUAL CASES OF LOSSES VALUED MORE THAN GAINS

People's common propensity to value losses more than otherwise commensurate gains, gives rise to different values of positive and negative changes in entitlements depending on the measure used to assess them. A major implication of the differing valuations is a need to choose an appropriate measure for particular changes. The appropriate choice of measure appears to turn on the reference state that people use to weigh the values of gains and losses: the distinction between the compensating and equivalent variation measures of values. If people view the present state as expected and normal, then the compensating measures apply; the equivalent variation measures are appropriate if they view the changed state as the reference.