Disappointment aversion in tournaments

Abstract

Many experiments and field studies indicate that individuals have an asymmetric attitude towards gains versus losses. In this paper, we extend the canonic tournament model by assuming the workers' preferences exhibit disappointment aversion. First, we find the winning prize is first increasing and then decreasing in volatility and the losing prize shows the opposite. Furthermore, when the volatility exceeds a threshold, both the winning and losing prizes are reduced to zero. By contrast, there is no such kink for the risk aversion case. Finally, we find the piece rates always dominate rank‐order tournaments when the workers are disappointment averse.

In‐store service decisions under consumer disappointment aversion

“…A critical feature of our model is that customers make a purchase decision by ex ante maximizing their expected utility, which includes both the monetary payoff and psychological disappointment (elation) payoff. Disappointment has been modeled in several studies, for example, Bell (1985), Inman et al (1997), Delquié and Cillo (2006), Liu and Shum (2013), Du et al (2019), and Wu (2021). However, the disappointment in service failure has not been modeled in either operation management or marketing.…”