| Summary: | This dissertation consists of three essays. The first examines analytically as well as empirically the mental accounting principle that Thaler (1985) termed the “silver lining principle.” The second and third essays investigate the link between attention and preferences. In the first essay, loss aversion is an important antecedent and moderator of the principle’s effect on preferences, and in the latter two we hypothesize both antecedent (Essay Two) and consequent (Essay Three) roles for loss aversion with respect to attention. The silver lining effect predicts that segregating a small gain from a larger loss results in greater psychological value than does integrating the gain(s) into a smaller loss. Using a generic prospect theory value function, we formalize this effect and derive conditions under which it should occur. We show analytically that if the gain is smaller than a certain threshold, segregation is optimal. This threshold increases with the size of the loss and decreases with the degree of loss aversion on the part of the decision maker. Our formal analysis results in a set of predictions suggesting that the silver lining effect is more likely to occur when (i) the gain is smaller (for a given loss), (ii) the loss is larger (for a given gain), and (iii) the decision maker is less loss-averse. We test and confirm these predictions in three studies of preferences, in both monetary and non-monetary settings, analyzing the data in a hierarchical Bayesian framework. The second and third essays together examine the relation between allocation of attention and choice behavior—in particular the sensitivity of choices to gains and losses (and thus loss aversion). An initial empirical study suggests an association between decision makers’ increased attention to losses and decreased attention to gains, and increased degrees of loss aversion. We then examine this association in two further empirical studies in order to test a potential causal relationship. The first of these manipulates loss aversion and measures attention, while the second manipulates attention and measures loss aversion. We find no systematic evidence for a causal link between attention and loss aversion; our findings rather suggest a common influence accounting for their initially observed association. Some of the results point to a potential role of perceptual fluency, though this possibility awaits further research. We propose an additional empirical study using an alternative manipulation of attention previously utilized by Shimojo et al. (2003), among others. We find evidence for a direct influence of attention on preferences, however, such that increased attention to positive attributes is associated with greater preference for an alternative, and vice versa for negative attributes. This result supports and extends previous work on the link between preferences and attention (e.g. Rangel 2008). In addition, we observe a novel phenomenon that we term attentional loss aversion, by which the direct influence of attention on preference for an alternative is stronger for negative attributes than for positive attributes.
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