Loss Aversion with a State-dependent Reference Point
This study investigates loss aversion when the reference point is state-dependent. Using a state-dependent structure, prospects are more attractive if they depend positively on the reference point and are less attractive in case of negative dependence. In addition, the structure is neutral in the sense that it avoids an inherent aversion to risky prospects and yields no loss when the prospect and the reference point are the same. Related to this, the preferred personal equilibrium equals the optimal consumption solution when the reference point is selected completely endogenously. Given that loss aversion is widespread, we conclude that the reference point generally includes an important exogenously fixed component.
|Keywords||disappointment theory, loss aversion, reference-dependent preferences, regret theory, stochastic reference points|
|Publisher||University of Lugano|
De Georgi, E.G., & Post, G.T.. (2008). Loss Aversion with a State-dependent Reference Point. University of Lugano. Retrieved from http://hdl.handle.net/1765/14061