Endogenizing Prospect Theory's Reference Point
AbstractIn previous models of (cumulative) prospect theory reference-dependence of preferences is imposed beforehand and the location of the reference point is exogenously determined. This note provides a foundation of prospect theory, where reference-dependence is derived from preference conditions and a unique reference point arises endogenously
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Bibliographic InfoPaper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1611.
Length: 16 pages
Date of creation: Mar 2010
Date of revision:
Prospect theory; reference point; diminishing sensitivity; loss aversion;
Find related papers by JEL classification:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-04-17 (All new papers)
- NEP-NEU-2010-04-17 (Neuroeconomics)
- NEP-UPT-2010-04-17 (Utility Models & Prospect Theory)
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- Xu, Hongli & Lou, Yingyan & Yin, Yafeng & Zhou, Jing, 2011. "A prospect-based user equilibrium model with endogenous reference points and its application in congestion pricing," Transportation Research Part B: Methodological, Elsevier, vol. 45(2), pages 311-328, February.
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