Fear and Promise of the Unknown: How Losses Discourage and Promote Exploration

42 Pages Posted: 27 Oct 2021

See all articles by Alycia Chin

Alycia Chin

Securities and Exchange Commission

David Hagmann

Carnegie Mellon University - Department of Social and Decision Sciences

George Loewenstein

Carnegie Mellon University - Department of Social and Decision Sciences

Date Written: October 27, 2021

Abstract

Many situations involving search, such as commuters trying out new routes or organizations testing new procedures, can subject the explorer to the potential for subjective losses – situations that are worse than the status quo. How does the potential for experiencing losses during the course of a search affect individuals’ appetite for exploration? In three incentivized studies, we manipulate search outcomes by presenting participants either with a gain-only environment or a gain-loss environment. The gain-loss environment offers identical relative incentives for exploration, but payoffs are shifted down and participants receive an initial endowment to offset the difference. In both conditions, participants engage in a novel search task in which they decide how to explore a one-dimensional environment, receiving payoffs based on their location in each period. Payoffs between neighboring options are correlated, and movement is restricted in each turn to immediately adjacent locations. We predict and find that participants are motivated to avoid losses, which increases exploration when they are incurring losses, but decreases exploration when they face the prospect of losses. We conclude that exploration is driven by hope of anticipated gains, constrained by fear of anticipated losses, and motivated by avoidance of experienced losses.

Keywords: explore-exploit, loss aversion, decisions from experience, framing

JEL Classification: D83

Suggested Citation

Chin, Alycia and Hagmann, David and Loewenstein, George F., Fear and Promise of the Unknown: How Losses Discourage and Promote Exploration (October 27, 2021). Available at SSRN: https://ssrn.com/abstract=3951294 or http://dx.doi.org/10.2139/ssrn.3951294

Alycia Chin (Contact Author)

Securities and Exchange Commission ( email )

100 F Street, NE
Washington, DC 20549
United States

HOME PAGE: http://www.sec.gov

David Hagmann

Carnegie Mellon University - Department of Social and Decision Sciences ( email )

Porter Hall 208
5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States
6469128602 (Phone)

HOME PAGE: http://www.dhagmann.com

George F. Loewenstein

Carnegie Mellon University - Department of Social and Decision Sciences ( email )

Pittsburgh, PA 15213-3890
United States
412-268-8787 (Phone)
412-268-6938 (Fax)

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