Loss Aversion and Consumption Choice: Theory and Experimental Evidence∗

In this paper, we analyze a consumer choice model with price uncertainty, loss aver-sion, and expectation–based reference points. The implications of this model are tested in an experiment in which participants have to make a consumption choice between two sandwiches. We make use of the fact that participants differ in their reported taste difference between the two sandwiches and the degree of loss aversion which we measure separately. We find that more loss–averse participants are more likely to opt for the cheaper sandwich, in line with predictions from theory. The estimates in the model with rational expectations are slightly more significant than those in the model with naı̈ve expectations