Expectations-Based Loss Aversion May Help Explain Seemingly Dominated Choices in Strategy-Proof Mechanisms

Deferred acceptance (DA), a widely implemented algorithm, is meant to improve allocations: under classical preferences, it induces preference-concordant rankings. However, recent evidence shows that-in both real, large-stakes applications and experiments -par-ticipants frequently play seemingly dominated, significantly costly strategies that avoid small chances of good outcomes. We show the-oretically why, with expectations-based loss aversion, this behavior may be partly intentional. Reanalyzing existing experimental data on random serial dictatorship (a restriction of DA), we show that such reference-dependent preferences, with a degree and distribu-tion of loss aversion that explain common levels of risk aversion elsewhere, fit the data better than no-loss-aversion preferences. (JELD11, D82, D91)