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Asymmetric gain–loss reference dependence and attitudes toward uncertainty

Author

Listed:
  • Juan Sebastián Lleras
  • Evan Piermont

    (Royal Holloway, University of London)

  • Richard Svoboda

    (The Lewin Group)

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 toward uncertainty. We show that loss aversion and reference dependence are equivalent to max–min and concave expected utility.

Suggested Citation

  • Juan Sebastián Lleras & Evan Piermont & Richard Svoboda, 2019. "Asymmetric gain–loss reference dependence and attitudes toward uncertainty," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 68(3), pages 669-699, October.
    • Handle: RePEc:spr:joecth:v:68:y:2019:i:3:d:10.1007_s00199-018-1138-4
    DOI: 10.1007/s00199-018-1138-4
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    More about this item

    Keywords

    Reference-dependent preferences; Endogenous reference points; Gain–loss attitudes; Subjective expected utility; Belief distortion;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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