The Importance of Loss Aversion in Public Preferences for Wetland Management Policies: Evidence from a Choice Experiment with Reference-Dependent Discrete Choice Model

Abstract

Scientific analysis of public preferences for wetland management policies could provide valuable information for the management by government, where individual preferences can be affected by the loss aversion. Hence, this paper aims to clarify the importance of loss aversion in public preferences for wetland management scenarios based on a choice experiment described by five attributes: wetland acreage, biodiversity, water condition, natural landscape, and payment for wetland management. We constructed a random parameters model based on reference-dependent utility to derive testable hypotheses about how loss aversion affects public preferences for wetland management scenarios. The results suggest that the reference-dependent random parameters models are more appropriate to account for the choices of respondents, indicating loss aversion is an important choice driver for wetland management policies. Moreover, both the loss aversion parameters in reference-dependent random parameters models are greater than 1, implying that respondents consider the losses from the deterioration of the current wetland attribute status are more than the gains from the improvement. Especially, the choice preferences are different in the two choice paradigms, considering with and without loss aversion. Our findings have important implications for policy-makers, as the choice prediction will be inaccurate without considering the importance of the loss aversion.