Motivating Innovation: The Effect of Loss Aversion on the Willingness to Persist

We investigate the willingness of individuals to persist at exploration when confronted by prolonged periods of negative feedback. We design a two-dimensional maze game and run a series of randomized experiments with human subjects in the game. Our results suggest individuals explore more when they are reminded of the incremental cost of their actions, a result that extends prior research on loss aversion and prospect theory to environments characterized by model uncertainty. In addition, we run simulations based on a model of reinforcement learning that extend beyond two-period models of decision making to account for repeated behavior in longer-running, dynamic contexts.