Abstract
This paper characterizes a model of reference-dependence, where a state-contingent contract (act) is evaluated by its expected value and its expected gain-loss utility. The expected utility of an act serves as the reference point, hence gains (resp., losses) occur when the act provides an outcome that is better (worse) than expected. The utility representation is characterized by a belief regarding the state space and a degree of reference-dependence; both are uniquely identified from behavior. We establish a link between this type of reference-dependence and attitudes towards uncertainty. We show that loss aversion and reference dependence are equivalent to MaxMin and concave expected utility.
Original language | English |
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Pages (from-to) | 1-31 |
Number of pages | 31 |
Journal | Economic Theory |
Early online date | 17 Jul 2018 |
DOIs | |
Publication status | E-pub ahead of print - 17 Jul 2018 |
Keywords
- Gain- Loss Attitudes
- Belief Distortion
- Reference Dependent Preferences
- Endogenous Reference Points