Abstract
This study examines the effects of initial endowment size on individual behavior in a binary choice game with no dominant strategy. Subjects make decisions in two, theoretically identical sequences, differing in initial endowment levels only. Each decision involves a choice between an option with a certain loss and an option with a loss that is increasing in the number of individuals who choose it. For the higher endowment level, all subjects are guaranteed a positive payoff. For the lower endowment level, subjects who choose the uncertain loss option could receive a negative payoff. The results indicate that in the first round of play, subjects with the higher endowment level choose the certain loss option significantly more often than subjects with the lower endowment level. There are, however, no significant differences in behavior beyond the first few rounds of play.
Highlights
Multiple laboratory experiments have shown that the frame of a decision environment matters.In particular, positive or gain framed and negative or loss framed decision environments have been shown to result in differing behavior
When using the traditional method of handling a domain of losses by giving subjects a sufficiently high initial endowment to guarantee positive payoffs, caution should be used in evaluating early round results
This study examines the effects of initial endowment size on individual behavior in a binary choice game framed in a domain of losses
Summary
Multiple laboratory experiments have shown that the frame of a decision environment matters. Positive or gain framed and negative or loss framed decision environments have been shown to result in differing behavior. Andreoni (1999) [1] found that in a linear public goods game, subjects were much more cooperative under a positive frame than a negative frame. Sonnemans et al (1998) [3] found similar results, which were later decomposed into different components in Cox (2015) [4]. We must use the appropriate frame for a given application in the laboratory, and for many applications, the relevant frame we need to use is the negative or loss frame. Implementing an experiment in this “domain of losses”, proves challenging, since we would have a difficult time conducting an experiment in which subjects pay us at the end of the experiment
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