The problems of how self-interested players can cooperate despite incentives to defect, and how players can coordinate despite the presence of multiple equilibria, are among the oldest and most fundamental in game theory. In this report, we demonstrate that a plausible and even natural specification of the reference outcome in a game simultaneously predicts systematic cooperation and defection in the Prisoner’s Dilemma, as well as equilibrium selection and out-of-equilibrium play in coordination games. The predictions hold even if players are purely self-interested, there are no salient labels, the game is played only once, and there is no communication of any kind. Furthermore, the predictions are unique, as opposed to the multiplicity of equilibria in the infinitely repeated Prisoner’s Dilemma and in coordination games. We apply experimental results to test the predictions of the model.

The principle of loss aversion is thought to explain a wide range of anomalousphenomena involving tradeoffs between losses and gains. In this article, I showthat the anomalies loss aversion was introduced to explain - the risky betpremium, the endowment effect, and the status-quo bias - are characterized notonly by a loss/gain tradeoff, but by a tradeoff between the status-quo andchange; and, that a propensity towards the status-quo in the latter tradeoff issufficient to explain these phenomena. Moreover, I show that two basicpsychological principles - (1) that motives drive behavior; and (2) thatpreferences tend to be fuzzy and ill-defined - imply the existence of a robustand fundamental propensity of this sort. Thus, a loss aversion principle isrendered superfluous to an account of the phenomena it was introduced toexplain.