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Loss aversion in a multi-period model

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  • Shalev, Jonathan

Abstract

An individual faces a choice between streams of outcomes in several periods in the future. This paper examines an axiomatization of preference relations over these streams that leads to a simple functional representation of these preferences. Motivated by the loss- aversion aspects of Tversky and Kahneman's prospect theory, the axioms lead to a representation that takes into account not only the utility of the per-period outcomes (instantaneous payoffs,) but also the differences between the utility of pairs of adjacent outcomes, and the direction of the differences (gains or losses). In this framework loss aversion is defined and characterized.

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Bibliographic Info

Article provided by Elsevier in its journal Mathematical Social Sciences.

Volume (Year): 33 (1997)
Issue (Month): 3 (June)
Pages: 203-226

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Handle: RePEc:eee:matsoc:v:33:y:1997:i:3:p:203-226

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Web page: http://www.elsevier.com/locate/inca/505565

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  1. Kahneman, Daniel & Thaler, Richard H, 1991. "Economic Analysis and the Psychology of Utility: Applications to Compensation Policy," American Economic Review, American Economic Association, vol. 81(2), pages 341-46, May.
  2. Wakker, Peter, 1993. "Savage's Axioms Usually Imply Violation of Strict Stochastic Dominance," Review of Economic Studies, Wiley Blackwell, vol. 60(2), pages 487-93, April.
  3. Gilboa, Itzhak, 1989. "Expectation and Variation in Multi-period Decisions," Econometrica, Econometric Society, vol. 57(5), pages 1153-69, September.
  4. F J Anscombe & R J Aumann, 2000. "A Definition of Subjective Probability," Levine's Working Paper Archive 7591, David K. Levine.
  5. Schmeidler, David, 1989. "Subjective Probability and Expected Utility without Additivity," Econometrica, Econometric Society, vol. 57(3), pages 571-87, May.
  6. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard H, 1990. "Experimental Tests of the Endowment Effect and the Coase Theorem," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1325-48, December.
  7. Lowenstein, George & Prelec, Drazen, 1991. "Negative Time Preference," American Economic Review, American Economic Association, vol. 81(2), pages 347-52, May.
  8. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  9. Wakker, Peter, 1990. "Characterizing optimism and pessimism directly through comonotonicity," Journal of Economic Theory, Elsevier, vol. 52(2), pages 453-463, December.
  10. Loewenstein, George F & Sicherman, Nachum, 1991. "Do Workers Prefer Increasing Wage Profiles?," Journal of Labor Economics, University of Chicago Press, vol. 9(1), pages 67-84, January.
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Citations

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Cited by:
  1. De Waegenaere, A.M.B. & Wakker, P.P., 1997. "Choquet Integrals With Respect to Non-Monotonic Set Functions," Discussion Paper 1997-44, Tilburg University, Center for Economic Research.
  2. Han Bleichrodt & José Luis Pinto, 2000. "An experimental test of loss aversion and scale compatibility," Economics Working Papers 467, Department of Economics and Business, Universitat Pompeu Fabra.
  3. Jonathan Shalev, 1998. "Loss Aversion in Repeated Games," Game Theory and Information 9802005, EconWPA.
  4. Rozen, Kareen, 2008. "Foundations of Intrinsic Habit Formation," Working Papers 40, Yale University, Department of Economics.
  5. Sujoy Mukerji & Jean-Marc Tallon, 2003. "An overview of economic applications of David Schmeidler`s models of decision making under uncertainty," Economics Series Working Papers 165, University of Oxford, Department of Economics.
  6. Chateauneuf, Alain & Ventura, Caroline, 2013. "G-continuity, impatience and myopia for Choquet multi-period utilities," Journal of Mathematical Economics, Elsevier, vol. 49(1), pages 97-105.
  7. Hojman, Daniel Andres & Kast, Felipe, 2009. "On the Measurement of Poverty Dynamics," Scholarly Articles 4449107, Harvard Kennedy School of Government.
  8. André Lapied & Robert Kast, 2005. "Updating Choquet valuation and discounting information arrivals," Working Papers 05-09, LAMETA, Universtiy of Montpellier, revised Jan 2005.
  9. De Waegenaere, Anja & Wakker, Peter P., 2001. "Nonmonotonic Choquet integrals," Journal of Mathematical Economics, Elsevier, vol. 36(1), pages 45-60, September.
  10. Chateauneuf, Alain & Rebille, Yann, 2004. "Some characterizations of non-additive multi-period models," Mathematical Social Sciences, Elsevier, vol. 48(3), pages 235-250, November.
  11. Han Bleichrodt & José Luis Pinto, 2000. "An experimental test of loss aversion and scale compatibility," Working Papers, Research Center on Health and Economics 467, Department of Economics and Business, Universitat Pompeu Fabra.

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