Gain and Loss Domains and the Choice of Welfare Measure of Positive and Negative Changes

Abstract

Mounting evidence continues to suggest that people value changes in terms of a neutral reference state and that those in the domain of losses are commonly valued far more than those in the gains. Consequently, both negative and positive changes in the domain of losses, including mitigation of losses such as restoring environmental quality and reducing accident rates, may be more accurately valued with the minimum acceptable-compensation (WTA) measure, those in the domain of gains are more accurate with the maximum willingness-to-pay (WTP) measure. Current practice, that assumes equivalence and that all positive changes are considered as gains, is therefore likely to often seriously mislead.