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Yesterday's expectation of tomorrow determines what you do today: The role of reference-dependent utility from expectations

Author

Listed:
  • Astrid Matthey

    (Max-Planck-Institute of Economics)

Abstract

The paper introduces the concept of adjustment utility, that is, reference-dependent utility from expectations. It offers an explanation for observed preferences that cannot be explained with existing models, and yields new predictions for individual decision making. The model gives a simple explanation for, e.g., why people are reluctant to change their plans even when these turn out to be unexpectedly costly; people's aversion towards positive but false information, which cannot be explained with previous models; and the increasing acceptance of risks when people get used to them.

Suggested Citation

  • Astrid Matthey, 2008. "Yesterday's expectation of tomorrow determines what you do today: The role of reference-dependent utility from expectations," Jena Economics Research Papers 2008-003, Friedrich-Schiller-University Jena.
    • Handle: RePEc:jrp:jrpwrp:2008-003
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    File URL: https://oweb.b67.uni-jena.de/Papers/jerp2008/wp_2008_003.pdf
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    Citations

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    Cited by:

    1. Jetlir Duraj, 2018. "Mechanism Design with News Utility," Papers 1808.04020, arXiv.org.
    2. Hsiaw, Alice, 2013. "Goal-setting and self-control," Journal of Economic Theory, Elsevier, vol. 148(2), pages 601-626.
    3. Fels, Markus, 2015. "On the value of information: Why people reject medical tests," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 56(C), pages 1-12.
    4. James P. Cover & Boyi Zhuang, 2021. "Life with habit and expectation: A new explanation of equity premium puzzle," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 50(1), February.
    5. 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.

    More about this item

    Keywords

    utility; expectations; reference-dependent preferences; anticipation; prospect theory; experiments;
    All these keywords.

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • C99 - Mathematical and Quantitative Methods - - Design of Experiments - - - Other

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