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Reference-dependent preferences : rationality, mechanism and welfare implications

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  • Raphaël Giraud

    ()
    (EUREQua/TEAM)

Abstract

In this paper, we ask three questions about reference-dependent preferences (RDP) : to what extent can they be said to be irrational ? What is the mechanism that underlies reference dependence? How to design welfare improving policies when preferences are reference-dependent? As to the first question, we characterize three notions of rationality to assess the rationality of RDP and show that there is a sense in which they are rational. As to the second, we show that the effect of a shifting reference point is two-sided : first modifying the relevant criteria for choice and second modifying the desirability of an option. As to the third question we define a welfare ordering based on the comparison of the strength of the status quo bias and show how to relate it to the representation of preferences.

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Bibliographic Info

Paper provided by Université Panthéon-Sorbonne (Paris 1) in its series Cahiers de la Maison des Sciences Economiques with number v04087.

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Length: 34 pages
Date of creation: Sep 2004
Date of revision:
Handle: RePEc:mse:wpsorb:v04087

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Keywords: Reference-dependent preferences; status quo; rationality; welfare ordering; reference point shifting; implicit criteria; partial orders.;

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  1. Tversky, Amos & Kahneman, Daniel, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1039-61, November.
  2. Samuelson, William & Zeckhauser, Richard, 1988. " Status Quo Bias in Decision Making," Journal of Risk and Uncertainty, Springer, vol. 1(1), pages 7-59, March.
  3. Masatlioglu, Yusufcan & Ok, Efe A., 2005. "Rational choice with status quo bias," Journal of Economic Theory, Elsevier, vol. 121(1), pages 1-29, March.
  4. Baucells, Manel & Shapley, Lloyd S., 2008. "Multiperson utility," Games and Economic Behavior, Elsevier, vol. 62(2), pages 329-347, March.
  5. Juan Dubra & Fabio Maccheroni & Efe Oki, 2001. "Expected utility theory without the completeness axiom," ICER Working Papers - Applied Mathematics Series 11-2001, ICER - International Centre for Economic Research.
  6. Sugden, Robert, 2003. "Reference-dependent subjective expected utility," Journal of Economic Theory, Elsevier, vol. 111(2), pages 172-191, August.
  7. Munro, Alistair & Sugden, Robert, 2003. "On the theory of reference-dependent preferences," Journal of Economic Behavior & Organization, Elsevier, vol. 50(4), pages 407-428, April.
  8. Donaldson, David & Weymark, John A., 1998. "A Quasiordering Is the Intersection of Orderings," Journal of Economic Theory, Elsevier, vol. 78(2), pages 382-387, February.
  9. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard H, 1990. "Experimental Tests of the Endowment Effect and the Coase Theorem," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1325-48, December.
  10. Duggan, John, 1999. "A General Extension Theorem for Binary Relations," Journal of Economic Theory, Elsevier, vol. 86(1), pages 1-16, May.
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Cited by:
  1. Jose Apesteguia & Miguel Ballester, 2009. "A theory of reference-dependent behavior," Economic Theory, Springer, vol. 40(3), pages 427-455, September.

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