Don’t aim too high: the potential costs of high aspirations
AbstractThe higher our aspirations, the higher the probability that we have to adjust them downwards when forming more realistic expectations later on. This paper shows that the costs induced by high aspirations are not trivial. We first develop a theoretical framework to identify the factors that determine the effect of aspirations on expected utility. Then we present evidence from a lab experiment on the factor found to be crucial: the adjustment of reference states to changes in expectations. The results suggest that the costs of high aspirations can be significant, since reference states do not adjust quickly. We use a novel, indirect approach that allows us to infer the determinants of the reference state from observed behavior, rather than to rely on cheap talk.
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Bibliographic InfoPaper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2008-011.
Length: 23 pages
Date of creation: Jan 2008
Date of revision:
aspirations; reference state; expectations; individual utility; experiments;
Other versions of this item:
- Astrid Matthey & Nadja Dwenger, 2007. "Don't aim too high: the potential costs of high aspirations," Jena Economic Research Papers 2007-097, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.
- D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
- C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-01-26 (All new papers)
- NEP-CBE-2008-01-26 (Cognitive & Behavioural Economics)
- NEP-EXP-2008-01-26 (Experimental Economics)
- NEP-HAP-2008-01-26 (Economics of Happiness)
- NEP-UPT-2008-01-26 (Utility Models & Prospect Theory)
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