Competence effects for choices involving gains and losses

We investigate how choices for uncertain gain and loss prospects are affected by the decision maker's perceived level of knowledge about the underlying domain of uncertainty. Specifically, we test whether Heath and Tversky's (J Risk Uncertain 4:5-28, 1991) competence hypothesis extends from gains to losses. We predict that the commonly-observed preference for high knowledge over low knowledge prospects for gains reverses for losses. We employ an empirical setup in which participants make hypothetical choices between gain or loss prospects in which the outcome depends on whether a high or low knowledge event occurs. We infer decision weighting functions for high and low knowledge events from choices using a representative agent preference model. For gains, we replicate the results of Kilka and Weber (Manage Sci 47:1712-1726, 2001), finding that decision makers are more attracted to choices that they feel more knowledgeable about. However, for losses, we find limited support for our extension of the competence effect.