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A Theory of Reference-Dependent Behavior

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  • Jose Apesteguia
  • Miguel A. Ballester

Abstract

Extensive field and experimental evidence in a variety of environments show that behavior depends on a reference point. This paper provides an axiomatic characterization of this dependence. We proceed by imposing gradually more structure on both choice correspondences and preference relations, requiring increasingly higher levels of rationality, and freeing the decision-maker from certain types of inconsistencies. The appropriate degree of behavioral structure will depend on the phenomenon that is to be modeled. Lastly, we provide two applications of our work: one to model the status-quo bias, and another to model addictive behavior.

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Bibliographic Info

Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 323.

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Date of creation: Sep 2007
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Handle: RePEc:bge:wpaper:323

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Keywords: Individual rationality; reference-dependence; rationalization; path independence; status-quo bias; addiction; habit formation.;

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References

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  1. Masatlioglu, Yusufcan & Ok, Efe A., 2005. "Rational choice with status quo bias," Journal of Economic Theory, Elsevier, Elsevier, vol. 121(1), pages 1-29, March.
  2. Rabin, Matthew, 1997. "Psychology and Economics," Department of Economics, Working Paper Series, Department of Economics, Institute for Business and Economic Research, UC Berkeley qt8jd5z5j2, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  3. Botond Koszegi & Matthew Rabin, 2005. "A Model of Reference-Dependent Preferences," Levine's Bibliography 784828000000000341, UCLA Department of Economics.
  4. Bossert, W. & Sprumont, Y., 2001. "Non-Deteriorating Choice," Cahiers de recherche, Centre interuniversitaire de recherche en économie quantitative, CIREQ 2001-01, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  5. Sugden, Robert, 2003. "Reference-dependent subjective expected utility," Journal of Economic Theory, Elsevier, Elsevier, vol. 111(2), pages 172-191, August.
  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, University of Chicago Press, vol. 98(6), pages 1325-48, December.
  7. Steffen Huck & Georg Kirchsteiger & Jörg Oechssler, 2003. "Learning to Like What You Have - Explaining the Endowment Effect," Bonn Econ Discussion Papers, University of Bonn, Germany bgse5_2003, University of Bonn, Germany.
  8. Samuelson, William & Zeckhauser, Richard, 1988. " Status Quo Bias in Decision Making," Journal of Risk and Uncertainty, Springer, Springer, vol. 1(1), pages 7-59, March.
  9. Rubinstein, A. & Zhou, L., 1997. "Choice Problems with a "Reference" Point," Papers, Tel Aviv 28-97, Tel Aviv.
  10. Knetsch, Jack L & Sinden, J A, 1984. "Willingness to Pay and Compensation Demanded: Experimental Evidence of an Unexpected Disparity in Measures of Value," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 99(3), pages 507-21, August.
  11. Raphaël Giraud, 2012. "Money matters: an axiomatic theory of the endowment effect," Economic Theory, Springer, Springer, vol. 50(2), pages 303-339, June.
  12. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  13. Munro, Alistair & Sugden, Robert, 2003. "On the theory of reference-dependent preferences," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 50(4), pages 407-428, April.
  14. Knetsch, Jack L, 1989. "The Endowment Effect and Evidence of Nonreversible Indifference Curves," American Economic Review, American Economic Association, American Economic Association, vol. 79(5), pages 1277-84, December.
  15. Sagi, Jacob S., 2006. "Anchored preference relations," Journal of Economic Theory, Elsevier, Elsevier, vol. 130(1), pages 283-295, September.
  16. Tversky, Amos & Slovic, Paul & Kahneman, Daniel, 1990. "The Causes of Preference Reversal," American Economic Review, American Economic Association, American Economic Association, vol. 80(1), pages 204-17, March.
  17. Gary S. Becker & Kevin M. Murphy, 1986. "A Theory of Rational Addiction," University of Chicago - George G. Stigler Center for Study of Economy and State, Chicago - Center for Study of Economy and State 41, Chicago - Center for Study of Economy and State.
  18. Raphaël Giraud, 2004. "Reference-dependent preferences : rationality, mechanism and welfare implications," Cahiers de la Maison des Sciences Economiques, Université Panthéon-Sorbonne (Paris 1) v04087, Université Panthéon-Sorbonne (Paris 1).
  19. Pollak, Robert A, 1970. "Habit Formation and Dynamic Demand Functions," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 78(4), pages 745-63, Part I Ju.
  20. Bateman, Ian J, et al, 1997. "A Test of the Theory of Reference-Dependent Preferences," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 112(2), pages 479-505, May.
  21. Mandler, Michael, 2005. "Incomplete preferences and rational intransitivity of choice," Games and Economic Behavior, Elsevier, Elsevier, vol. 50(2), pages 255-277, February.
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Citations

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Cited by:
  1. Amadeo Piolatto & Matthew Rablen, 2013. "Prospect theory and tax evasion: a reconsideration of the Yitzhaki Puzzle," IFS Working Papers, Institute for Fiscal Studies W13/25, Institute for Fiscal Studies.
  2. Torben Andersen & Joydeep Bhattacharya, 2011. "On myopia as rationale for social security," Economic Theory, Springer, Springer, vol. 47(1), pages 135-158, May.
  3. Ghossoub, Mario, 2011. "Towards a Purely Behavioral Definition of Loss Aversion," MPRA Paper 37628, University Library of Munich, Germany, revised 23 Mar 2012.
  4. Jose Apesteguia & Miguel A. Ballester, 2012. "Choice by sequential procedures," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 1309, Department of Economics and Business, Universitat Pompeu Fabra.
  5. Daniel Krähmer & Rebecca Stone, 2013. "Anticipated regret as an explanation of uncertainty aversion," Economic Theory, Springer, Springer, vol. 52(2), pages 709-728, March.
  6. Raphaël Giraud, 2010. "On the interpretation of the WTP/WTA gap as imprecise utility: an axiomatic analysis," Post-Print, HAL halshs-00490846, HAL.
  7. Daniele Pennesi, 2013. "Endogenous Status Quo," Carlo Alberto Notebooks, Collegio Carlo Alberto 314, Collegio Carlo Alberto.
  8. Raphaël Giraud, 2012. "Money matters: an axiomatic theory of the endowment effect," Economic Theory, Springer, Springer, vol. 50(2), pages 303-339, June.
  9. Özgür Evren, 2012. "Scalarization Methods and Expected Multi-Utility Representations," Working Papers, Center for Economic and Financial Research (CEFIR) w0174, Center for Economic and Financial Research (CEFIR).
  10. Bruttel, Lisa & Friehe, Tim, 2014. "On the path dependence of tax compliance," European Economic Review, Elsevier, Elsevier, vol. 65(C), pages 90-107.
  11. Douadia Bougherara & Xavier Gassmann & Laurent Piet, 2011. "A structural estimation of French farmers’ risk preferences: an artefactual field experiment," Working Papers SMART - LERECO, INRA UMR SMART 11-06, INRA UMR SMART.
  12. Papi, Mauro, 2012. "Satisficing choice procedures," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 84(1), pages 451-462.
  13. Evren, Özgür & Ok, Efe A., 2011. "On the multi-utility representation of preference relations," Journal of Mathematical Economics, Elsevier, vol. 47(4-5), pages 554-563.

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