Abstract:

Product differentiation, customer volume, and cost minimization drive profit in the restaurant industry. But for many firms their day-to-day focus is on cost minimization. At the same time psychologists have argued that preferences are constructed via practice with decision problems. Do the day-to-day decisions of restaurants breed an overemphasis on costs? This paper uses data from surveys with restaurant owners to show that they weigh costs more than benefits and, in fact, that they are loss averse around a reference point of 0. It correlates their loss aversion with the demand elasticity they perceive, their propensity to take on risk, experience, among other factors. The correlation with experience is the only one that survives – i.e. owners with more experience are more loss averse.