Making regulation fit by taking irrationality into account: the case of the whistleblower

TY - JOUR

T1 - Making regulation fit by taking irrationality into account

T2 - the case of the whistleblower

AU - Oelrich, Sebastian

N1 - Publisher Copyright: © 2019, The Author(s).

PY - 2019/4/1

Y1 - 2019/4/1

N2 - Prospect theory describes people as bounded rational decision maker. What sparked widespread discussion after its initial introduction in 1979 is today criticized for lack of applicability. I use the debate about whistleblowing laws to show that prospect theory may be applied prescriptively in economics as a tool to design effective legislation. Whistleblowing is often seen as an important way to uncover fraud, which causes billions of USD in damages annually. I first examine the fragmented legal landscape across Europe, showing that it can be framed as one favoring rewards or the prevention of losses. I conduct an experiment with 39 university students, wherein legislative incentives are evaluated under a prospect theoretical frame in a setting of ambiguity and high stakes. Results suggest that people exhibit the typical s-shaped value function and loss aversion in line with prospect theory. In addition, their intention to whistleblow is more heavily reduced by losses than increased by gains. The study adds to the scarce literature of prospect theory on decisions in ambiguous contexts—as well as to the applicability of the theory as a prescriptive instrument in designing institutional frames. For whistleblowing in particular, a protection-based approach seems most promising.

AB - Prospect theory describes people as bounded rational decision maker. What sparked widespread discussion after its initial introduction in 1979 is today criticized for lack of applicability. I use the debate about whistleblowing laws to show that prospect theory may be applied prescriptively in economics as a tool to design effective legislation. Whistleblowing is often seen as an important way to uncover fraud, which causes billions of USD in damages annually. I first examine the fragmented legal landscape across Europe, showing that it can be framed as one favoring rewards or the prevention of losses. I conduct an experiment with 39 university students, wherein legislative incentives are evaluated under a prospect theoretical frame in a setting of ambiguity and high stakes. Results suggest that people exhibit the typical s-shaped value function and loss aversion in line with prospect theory. In addition, their intention to whistleblow is more heavily reduced by losses than increased by gains. The study adds to the scarce literature of prospect theory on decisions in ambiguous contexts—as well as to the applicability of the theory as a prescriptive instrument in designing institutional frames. For whistleblowing in particular, a protection-based approach seems most promising.

KW - Fraud

KW - Loss aversion

KW - Prospect theory

KW - Regulation

KW - Whistleblower

UR - http://www.scopus.com/inward/record.url?scp=85065726820&partnerID=8YFLogxK

U2 - 10.1007/s40685-019-0094-6

DO - 10.1007/s40685-019-0094-6

M3 - Journal article

AN - SCOPUS:85065726820

SN - 2198-3402

VL - 12

SP - 175

EP - 207

JO - Business Research

JF - Business Research

IS - 1

ER -