Regret and disappointment in taxpayer reporting decisions: An experimental study

Abstract

This paper reports on experiments which test whether factors such as regret or disappointment influence taxpayer compliance decisions. Previous tests of regret and disappointment theory have been based upon the common-ratio effect in which probabilities vary while outcomes are held fixed. In contrast, our experiments involved trials in which the outcomes were allowed to vary. Previous tests had mainly found evidence of regret effects and to a lesser extent were supportive of disappointment. In contrast, we were able to reject simple theories of both regret and disappointment. A second experiment produced evidence which indicates that whether or not rejected risky alternatives are resolved has no significant influence on subjects' choices. One would expect that regret could only occur when a subject learns the outcome of a non-chosen option. Hence this result can be seen as evidence against regret theory. We shall argue that there is a possible interpretation of regret theory which is compatible with this result.