Academic journal article Economic Inquiry

Reference-Dependent Preferences, Loss Aversion, and Live Game Attendance

Academic journal article Economic Inquiry

Reference-Dependent Preferences, Loss Aversion, and Live Game Attendance

Article excerpt

We develop a consumer choice model of live attendance at a sporting event with reference-dependent preferences. The predictions of the model motivate the "uncertainty of outcome hypothesis" (UOH) as well as fans' desire to see upsets and to simply see the home team win games, depending on the importance of the reference-dependent preferences and loss aversion. A critical review of previous empirical tests of the UOH reveals significant support for models with reference-dependent preferences, but less support for the UOH. New empirical evidence from Major League Baseball supports the loss aversion version of the model. (JEL L83, D12)

I. INTRODUCTION

Recent events in economic and financial markets reemphasize the importance of understanding decision making under uncertainty. Individuals make decisions that involve uncertain outcomes in a variety of settings, including decisions about the purchase and holding of risky assets like stocks and bonds (Lintner 1965), human capital investment (Kodde 1986), labor supply (Camerer et al. 1997), gambling (Sauer 1998), entertainment (Post et al. 2008), and others. In the sports economics literature, a body of research focuses on the effect of uncertainty about game outcomes on consumer demand. The decision to attend a sporting event involves uncertainty, because the consumer does not know the outcome of the game at the time the ticket is purchased. Recent research points out the importance of reference points that reflect consumer's expectations when making decisions under uncertainty (Koszegi and Rabin 2006).

The idea that demand for sporting events depends on the uncertainty of game outcomes was first identified by Rottenberg (1956) in a seminal paper and has long been referred to as the "uncertainty of outcome hypothesis" (UOH). The UOH forms the basis of a large literature on competitive balance in sport (Fort and Quirk 1995). Rottenberg (1956) observed that attendance demand depends on "the dispersion of percentages of games won by the teams in the league" (p. 246) and further observed: "That is to say, the 'tighter' the competition, the larger the attendance. A pennant-winning team that wins 80 per cent of its games will attract fewer patrons than a pennant-winning team that wins 55 per cent of them" (p. 246, footnote 21). These observations form the basis of the UOH, which generated a large empirical literature. Neale (1964), in another early paper, also addressed the UOH. Neale (1964) observed that in order for fans to attend sporting events, listen to events on radio, or watch events on television, some uncertainty of outcome about the contest must exist: "Of itself there is excitement in the daily changes in the standings or the daily changes in possibilities of changes in standings. The closer the standings, and within any range of standings the more frequently the standings change, the larger will be the gate receipts" (p. 3).

Interestingly, neither Rottenberg (1956) and Neale (1964), nor any subsequent researcher, developed a model of consumer behavior to motivate this observation; the UOH has been accepted as an accurate description of the outcome of consumer choices with no theoretic basis for more than 50 years. Instead, research focused on developing models of team and league behavior that generated different levels of winning percentage dispersion, which reflects outcome uncertainty, depending on market and team characteristics.

In this article, we develop a consumer choice model of the decision to attend sporting events that include uncertainty and reference-dependent preferences to motivate the UOH. Our model adopts the basic framework of the model in Card and Dahl (2009), where consumers decide whether to watch a national football league (NFL) game involving their local team on television with rational anticipation that an unexpected loss may trigger family violence. We abstract from the emotional cues and triggers in Card and Dahl's (2009) model, and focus on the decision to attend a live game. …

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