Loss Aversion with a State-dependent Reference Point
2008-04-30
Research Paper
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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
- loss aversion
- reference-dependent preferences
- regret theory
- stochastic reference points
- disappointment theory
Classifications using
Journal of Economic Literature (JEL) Classification System
- D81 : Criteria for Decision-Making under Risk and Uncertainty
- C91 : Laboratory, Individual Behavior
- C23 : Models with Panel Data
- C93 : Field Experiments
Automatically Extracted Terms
- reference point
- point
- reference
- utility
- prospect
- equilibrium
- model
- y | x
- state-dependent
- stock
- y | y
- decision maker
- consumption
- gain-loss utility
- decision
- reference-dependent
- consumption utility
- example
- aversion
- reference-dependent utility
