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Don’t aim too high: the potential costs of high aspirations

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  • Astrid Matthey
  • Nadja Dwenger

Abstract

The 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 Info

Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2008-011.

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Length: 23 pages
Date of creation: Jan 2008
Date of revision:
Handle: RePEc:hum:wpaper:sfb649dp2008-011

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Keywords: aspirations; reference state; expectations; individual utility; experiments;

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References

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  1. Andrew B. Abel, 1990. "Asset Prices under Habit Formation and Catching up with the Joneses," NBER Working Papers 3279, National Bureau of Economic Research, Inc.
  2. Michael McBride, 2007. "Money, Happiness, and Aspirations: An Experimental Study," Working Papers 060721, University of California-Irvine, Department of Economics, revised Jul 2008.
  3. Jonathan Shalev, 1997. "Loss Aversion Equilibrium," Game Theory and Information 9703001, EconWPA, revised 11 Mar 1997.
  4. Sagi, Jacob S., 2006. "Anchored preference relations," Journal of Economic Theory, Elsevier, vol. 130(1), pages 283-295, September.
  5. John Y. Campbell & John H. Cochrane, 1994. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," CRSP working papers 412, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  6. Botond Koszegi & Matthew Rabin, 2005. "A Model of Reference-Dependent Preferences," Levine's Bibliography 784828000000000341, UCLA Department of Economics.
  7. John Y. Campbell & John Cochrane, 1999. "Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Journal of Political Economy, University of Chicago Press, vol. 107(2), pages 205-251, April.
  8. George A. Akerlof & Rachel E. Kranton, 2000. "Economics And Identity," The Quarterly Journal of Economics, MIT Press, vol. 115(3), pages 715-753, August.
  9. Richard H. Thaler & Eric J. Johnson, 1990. "Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice," Management Science, INFORMS, vol. 36(6), pages 643-660, June.
  10. Selten, Reinhard, 1996. "Aspiration Adaptation Theory," Discussion Paper Serie B 389, University of Bonn, Germany.
  11. Stutzer, Alois, 2004. "The role of income aspirations in individual happiness," Journal of Economic Behavior & Organization, Elsevier, vol. 54(1), pages 89-109, May.
  12. Ng, Yew-Kwang & Wang, Jianguo, 2001. "Attitude choice, economic change, and welfare," Journal of Economic Behavior & Organization, Elsevier, vol. 45(3), pages 279-291, July.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Ambition hurts
    by chris dillow in Stumbling and Mumbling on 2007-12-10 15:00:50
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Cited by:
  1. Koch, Alexander K. & Nafziger, Julia, 2011. "Goals and Psychological Accounting," IZA Discussion Papers 5802, Institute for the Study of Labor (IZA).
  2. Alexander K. Koch, & Julia Nafziger & Anton Suvorov & Jeroen van de Ven, 2012. "Self-Rewards and Personal Motivation," Economics Working Papers 2012-14, School of Economics and Management, University of Aarhus.
  3. Quang Nguyen, 2011. "Does nurture matter: Theory and experimental investigation on the effect of working environment on risk and time preferences," Journal of Risk and Uncertainty, Springer, vol. 43(3), pages 245-270, December.

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