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

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Author Info

  • Astrid Matthey

    ()
    (Max-Planck-Institute of Economics Jena, Germany)

  • Nadja Dwenger

    (DIW Berlin, Germany)

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 ?rst 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 signi?cant, 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 Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics in its series Jena Economic Research Papers with number 2007-097.

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Date of creation: 04 Dec 2007
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Handle: RePEc:jrp:jrpwrp:2007-097

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

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References

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  1. Jonathan Shalev, 2000. "Loss aversion equilibrium," International Journal of Game Theory, Springer, vol. 29(2), pages 269-287.
  2. Stutzer, Alois, 2004. "The role of income aspirations in individual happiness," Journal of Economic Behavior & Organization, Elsevier, vol. 54(1), pages 89-109, May.
  3. Botond Koszegi & Matthew Rabin, 2004. "A Model of Reference-Dependent Preferences," Method and Hist of Econ Thought 0407001, EconWPA.
  4. Sagi, Jacob S., 2006. "Anchored preference relations," Journal of Economic Theory, Elsevier, vol. 130(1), pages 283-295, September.
  5. McBride, Michael, 2010. "Money, happiness, and aspirations: An experimental study," Journal of Economic Behavior & Organization, Elsevier, vol. 74(3), pages 262-276, June.
  6. Abel, A.B., 1990. "Asset Prices Under Habit Formation And Catching Up With The Joneses," Weiss Center Working Papers 1-90, Wharton School - Weiss Center for International Financial Research.
  7. Cochrane, John H. & Campbell, John, 1999. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Scholarly Articles 3119444, Harvard University Department of Economics.
  8. 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.
  9. George A. Akerlof & Rachel E. Kranton, 2000. "Economics And Identity," The Quarterly Journal of Economics, MIT Press, vol. 115(3), pages 715-753, August.
  10. 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.
  11. 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.
  12. Selten, Reinhard, 1996. "Aspiration Adaptation Theory," Discussion Paper Serie B 389, University of Bonn, Germany.
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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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