Why Do Business Losses Cause Conflict?

Evidence suggests that conflicts between contracting parties are more prone to occur when a party has suffered a significant loss. It is argued that the phenomenon is difficult to understand within conventional contract theory, which assumes full rationality, while behavioral theories based on the concepts of motivated reasoning and reciprocity provide interesting explanations. Thus, losses can trigger motivated, self-serving perceptions and beliefs, which in turn are likely to induce negative reciprocity as well as counter-productive acts aimed at bolstering self-image. These explanations are demonstrated to be well supported by experiments