The coexistence of loss aversion and regret aversion in decision making under risk

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Abstract This paper explores the concurrent roles of prospect theory and regret theory in decision making under risk through a series of carefully designed experiments. We demonstrate that both models can be important for explaining real human choices in uncertain environments. Our experimental paradigm uses pairs of binary lotteries designed to induce both loss aversion and regret, with one gamble always involving a loss and the other changing from mixed, with both a gain and a loss, to gain only. Changes in behavior around these switching points elucidate loss aversion. Three feedback treatments are employed—no feedback, partial feedback (where only the chosen gamble’s outcome is revealed), and complete feedback (where outcomes of both gambles are revealed)—to assess how different levels of information influence decision making. In the no feedback treatment, we find strong support for prospect theory. When feedback is introduced, participants’ behavior reflects both prospect theory and regret theory although loss aversion has a greater impact than regret. Our findings underscore the importance of considering such hybrid models in evaluating decision making under risk, as well as the need to account for the information available to decision makers, as behavior varies with different feedback conditions.

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